If you have been contributing to a Traditional IRA, eventually you will need to take yearly required minimum distributions (RMDs). The first RMD is required the year you turn 70 ½, and they continue each year after that. Roth IRAs don’t require RMDs, since those contributions were made post-tax. RMDs on Traditional IRAs are the government’s way of ensuring they get their tax money from investors. Usually, investors make contributions to their IRA pre-tax, and they can write off the contribution on their taxes. When they take a distribution, they are taxed on the money based on their income levels. More frequently asked questions about RMDs are answered below.
When Do I Have to Take an RMD?
The first year you are required to take an RMD is the year you turn 70 ½. In this year you are allowed to postpone taking it until Tax Day April of the following year. So, if you turn 70 ½ in 2018, you can wait to take your RMD until April of 2019. Every year after the first year, you will be required to take your RMD by December 31st. If you do choose to wait until April 2019 to take your first RMD, your second RMD will be due December 2019. This means you will have two RMDs in the same year and both will count as taxable income for the year. This could bump you to a higher tax bracket, so before choosing to wait, crunch the numbers to make sure you aren’t hurting yourself at tax time.
How Do I Calculate My RMD?
The IRS uses a special table to calculate your RMD. Basically, they take the fair market valuation of your IRA and divide it by your life expectancy. You can view the charts here and make a worksheet outlining your RMDs near the bottom of the page. Some institutions allow investors to automatically withdraw the RMD from their account each year so plan owners don’t have to worry about figuring out the exact amount to withdraw each year.
Can I Withdraw More than the RMD?
Plan owners are allowed to withdraw more than their RMD each year, but this may bump them to a higher tax bracket at tax time. Extra distributions also do not count toward next year’s RMD.
What if I Have More Than One Account with RMDs?
If you have more than one account requiring RMDs, such as a Traditional IRA and a 401(k), then you can take your distributions from either account. The total amount must line up with what the IRS requires of you for the year, but you could take it all from one account or split it between both.
What is the Penalty for Not Taking an RMD?
If you didn’t take an RMD, or you missed the deadline, the IRS will penalize you up to 50% of what the RMD was. So, if you needed to take out $20,000, but missed the deadline, the IRS could penalize you $10,000. For more information on this topic, read our article What to do if You’ve Missed an RMD on an IRA.
Am I Taxed on My RMD?
If you made tax-deductible contributions, those contributions and your earnings will be taxed when you take your RMD. If you made contributions post-tax, then you won’t be taxed again on that portion of your distribution, but you will still be taxed on your earnings from the account.
What Can I Do with the Money if I Don’t Need it for Living Expenses?
If your RMD is more than what you need for living expenses, there are a few options you can do with the extra funds. The most popular options people choose are contributing the funds into a college savings plan or converting into a Roth IRA if they qualify.