If
you have an account in a qualified retirement plan, you need to understand that
one day you will be forced to take withdrawals from your account whether you
want to or not. For many this is not a significant concern as these accounts
were designed to provide their income in retirement and they are or will
withdraw more than enough from them to satisfy the rules. Either way, we will
cover some of the basics about Required Minimum Distribution (RMD) along with
some key considerations.
Required
Minimum Distributions, as already stated, apply to employer sponsored
retirement plans including 401(k), 403(b), 457(b), and profit-sharing plans.
RMD also applies to traditional IRAs and IRA-based plans such as SEPs, SARSEPs
and SIMPLE IRAs.
So
what is RMD? As the name implies, it is a minimum amount that an account holder
must withdraw on an annual basis. The first such withdrawal must be made in the
year in which the account holder reached age 70 ½. For the very first
withdrawal, the deadline for the withdrawal is actually April 1st of
the next year, but from that point forward, the withdrawals must be made by
December 31st each year.
The
amount of the withdrawal will vary each year. To determine the minimum
withdrawal, you start with the account balance as of the prior year-end. You
then find a divisor by referring to the appropriate life expectancy chart from
the IRS and using the factor based on your age at year-end.
Age
|
Distribution Period
|
Age
|
Distribution Period
|
70
|
27.4
|
93
|
9.6
|
71
|
26.5
|
94
|
9.1
|
72
|
25.6
|
95
|
8.6
|
73
|
24.7
|
96
|
8.1
|
74
|
23.8
|
97
|
7.6
|
75
|
22.9
|
98
|
7.1
|
76
|
22.0
|
99
|
6.7
|
77
|
21.2
|
100
|
6.3
|
78
|
20.3
|
101
|
5.9
|
79
|
19.5
|
102
|
5.5
|
80
|
18.7
|
103
|
5.2
|
81
|
17.9
|
104
|
4.9
|
82
|
17.1
|
105
|
4.5
|
83
|
16.3
|
106
|
4.2
|
84
|
15.5
|
107
|
3.9
|
85
|
14.8
|
108
|
3.7
|
86
|
14.1
|
109
|
3.4
|
87
|
13.4
|
110
|
3.1
|
88
|
12.7
|
111
|
2.9
|
89
|
12.0
|
112
|
2.6
|
90
|
11.4
|
113
|
2.4
|
91
|
10.8
|
114
|
2.1
|
92
|
10.2
|
115+
|
1.9
|
Source:
www.irs.gov/publications/p590b/index.html#en_US_2014_publink1000231236
For
example, let’s consider the fictitious case of James Buchanan. Let’s assume
James has been taking RMDs and will now turn 74 in 2015. His IRA account
balance as of December 31, 2014 is $100,000. Since he will be 74 at the end of
2015, his factor will be 23.8. If we divide $100,000 by 23.8, we get $4,201.68.
Therefore, James will need to withdraw at least $4,201.68 from his IRA account
by December 31, 2015.
That’s
a quick review of the basics, but there is more to the issue. We won’t go into the
complicated details here, but there are exceptions when RMD can be postponed
past 70 ½. Also, the penalty for not taking an RMD is severe – a 50% tax on the
required withdrawal.
In
part two of this blog we’ll continue the discussion of RMD and in particular
mistakes to avoid if you have multiple retirement plan accounts.
If we at
Kemp
Harvest Financial Group
can help you in any way with regard to your Required Minimum Distributions or
other financial planning needs, please feel free to contact
us.
For more
topics like this, check out our radio show “Retirement Plain and Simple” every
Saturday morning at 8 on WNPV 1440 AM and like us on Facebook!
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