Everyone that reaches the age of 72 who has a retirement plan or an IRA will have to begin taking distributions from those accounts to avoid being penalized by the IRS. The general rule is that you have to take a required minimum distribution (RMD) by April 1st of the year following the year that you turn 72. Just a quick note: there are no RMDs for Roth IRAs.
These distributions are calculated by using the account value at the end of the last year and dividing it by the factor assigned to your age in the current year in the tables provided by the IRS in Publication 590-B Distributions from Individual Retirement Arrangements (IRAs). The table that almost everyone will use while they are living is found in this publication under Appendix B. Uniform Lifetime Table (Table III). Here is a link to that publication for reference: https://www.irs.gov/publications/p590b#en_US_2020_publink1000231236.
If you have more than one IRA and/or retirement plan, such as a 401k, you have to calculate the RMD for each account, but you can take the total RMD from just one account or any combination of accounts. Also, you can take these distributions periodically over the course of the year or as a lump sum.
These distributions are taxed as ordinary income (except for any after-tax contributions, which are uncommon). If you fail to take out the RMD amount, you will get hit with a 50% penalty and taxes on any shortfall between what you took out and the RMD amount.
If the owner of an IRA passes away, the beneficiary becomes the owner of what is known as an inherited IRA. I’ll talk about inherited IRAs in a separate post to avoid any confusion.
There is one notable way to postpone taking your RMDs and it applies to company-sponsored retirement plans, such as a 401k. If you are still working for a company and have a 401k with them, you can delay your RMDs until you leave that company. If you have other retirement accounts, you could roll them into that active 401k to avoid RMDs for those accounts as well, as long as your company’s plan allows rollovers.
Please let me know if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
