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When To Take Your Required Minimum Distributions From Your Retirement Accounts

November 14, 2016

Did you reach age 70 ½ this year? Time to take required minimum distributions (RMDs) from your retirement accounts.

You might not remember to celebrate your “half birthday,” but the IRS will remember.

If you celebrated your 70½ birthday in 2016 (your actual birthday falls between July 1, 1945 to June 30, 1946) Uncle Sam wants to wish you a Happy Birthday by requiring you to take a Required Minimum Distribution (”RMD”) from your retirement account.

Required Minimum Distributions

As a Birthday present, the IRS will require you to take an RMD from your retirement accounts before April 1, 2017.

A few things you should know:

  • You must take these RMDs from your traditional IRAs (not your Roth IRAs.)
    • Why? Paternalistically, the tax rules require minimum annual distributions be made to help assure that IRAs are used primarily to provide for retirement, rather than as a family tax shelter for future generations. Realistically, the government needs the tax revenue.
  • Your first required distribution year is the year you turn age 70½, 2016 in this example, even though the distribution can be made as late as April 1st, 2017.
  • For each year thereafter, the required minimum distribution must be made annually by December 31.
  • If you wait until April 1, 2017 to take your first RMD, you will have to take two distributions in 2017 – one for 2016 and one for 2017. This bunching on income could negatively impact your income taxes. If so, you may want to take your first distribution before December 31, 2016.

How are RMDs calculated?

Annually the required minimum distribution is calculated by dividing the IRA balance as of December 31 of the preceding calendar year by the applicable life expectancy factor. More good news - the IRS thinks you will live another 27.4 years!

Complications in the computation may arise if you have more than one IRA account. The RMD is based on the total of all the accounts, but you can take the funds from any account, or a combination of the accounts.

Whose responsibility is it to take the RMD?

IRA trustees are required to report the required distribution amount to IRA owners, or to calculate it for the owners on request, by January 31 of the year the distribution is required.

However, as the required minimum distribution can be withdrawn from whichever IRA you chose, you are responsible for ensuring the proper amount is timely received. You could be hit with a 50% penalty tax if you don’t withdraw the required minimum amounts each year. It is your responsibility to take the RMD, not the trustee’s.

Annual distributions are also required to be made from your employer’s qualified plan. Generally, the plan administrator is responsible for calculating and timely paying the RMD amount from qualified retirement plans.

So, if you had your 70½ Birthday in 2016, happy half birthday and remember, you have some planning to do before the New Year. For more information about RMDs and tax saving options such as direct IRA contributions to your favorite charity, contact us.

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