Required Minimum Distribution - IRA's & Qualified Retirement Plans (QRP's)
What is a Required Mininum Distribution (RMD)?
Beginning age 70 ½ you are required to take distributions from your IRA's & Qualified Retirement Plans (QRP's) each year based on an IRS formula. This RMD calculator will help you to determine the proper amount to withdrawal based on the value of the plan, your age & your beneficiaries age. The distribution is included in taxable income & subject to income tax since these funds were excluded from taxable income when they were originally contributed to the plan.
Plans subject to RMD
- IRA (traditional, rollover or inherited)*
- SEP IRA
- SIMPLE IRA
- Qualified Retirement Plans - including 401(k) & other employer sponsored plans
*Roth IRA's are not subject to RMD rules.
Penalty for not taking RMD as required
You must withdrawal at least the minimum amount each year as required by the IRS formula. The penalty for not taking at least the required minimum distribution is 50% of the difference between the RMD calculated amount & the amount actually withdrawn from the plan. Since this penalty is very severe, it is crucial to make sure the calculation is done properly & planning is done in advance. The RMD is often calculated for you by the plan custodian or administrator but it is best to double check these calculations especially if you have multiple plans since you are ultimately responsible for taking the correct RMD & are liable for any penalties assessed by the IRS if the RMD requirement is not fulfilled.
You must take the RMD by December 31 of each year except for the year when you first turn 70 ½ (you have until April 1 of the following year to take the RMD). If you have more than 1 IRA you must calculate the RMD for each IRA separately, but you can withdrawal the required amount from any combination of those accounts. However, RMD's from other types of plans such as 401(k) plans must be taken from the specific account to which the RMD amount is calculated. If you take a withdrawal in excess of the RMD in one year, the excess amount cannot be rolled over to another year to reduce the RMD in a future year.
RMD strategies & tax planning
Since you must withdrawal at least the RMD amount & pay tax on that amount, It is a good idea to plan in advance for the tax consequences of the RMD withdrawal. You should also consider your cash requirements for the current & upcoming year to determine if the calculated RMD amount is sufficient to cover your needs or if you will need to withdrawal a higher amount. If you require more than the calculated RMD for cash flow needs, it might be advantageous to vary the withdrawal amounts between years as opposed to taking the same amount every year. We can assist you in determining the optimum withdrawal amounts to achieve the lowest taxes paid overall.