Required Minimum Distribution Planning.
By: Duane J. Silbernagel
For years, you’ve been told that you shouldn’t withdraw money from your retirement accounts unless you have to. However, once you reach a certain age you will have to, in most cases, or face stiff tax penalties.
Required Minimum Distributions (commonly referred to as RMDs) are required by the IRS once you reach age 70½. When you save into most qualified retirement accounts (non-Roth IRAs, 401(k), 403(b), etc.) over the course of your career, the IRS has allowed you to defer paying taxes on those funds, with the understanding that starting when you’re 70½ years old, you will be required to start pulling funds out of those accounts – if you need it, or not.
There seems to be a lot of confusion when it comes to the calculations of RMDs. In reality, the concept is simple:
Open your end of year statements from the various retirement accounts you’ve accrued over the years. Note: RMDs are based on Social Security Number – if you’re married, each spouse will do this for their respective accounts. Add all of those values together – Example: Assume my aggregated balance on 12/31/2014 is $100,000.00.
Know what your age will be at the end of the current year – Example: Assume that my age on 12/31/2015 is going to be 85.
Find your “withdrawal factor.” To find this, you can sift through IRS Publication 590-B (2014), Appendix B – Uniform Lifetime Table, Table III. You can also use a user-friendly calculator found at: http://apps.finra.org/Calcs/1/RMD – Example: Given the above assumptions, my withdrawal factor will be 14.8. Calculate your RMD amount. Divide your aggregated retirement accounts (step 2) by the withdrawal factor (step 4). If you use the calculator I referenced, it does this nicely for you. In my example this would be $100,000/14.8=$. This is the amount of money that you’re going to be required to take out for the current calendar year, to meet the requirements. Failure to withdrawal the required amount by 12/31 of the current calendar year will result in a 50% tax on the money not withdrawn – and still have to remove the money from the account.
Depending on the type of qualified retirement account you have will determine how you must go about taking your RMD, for example:
• If you have multiple IRA accounts (traditional IRAs, rollover IRAs, SEP IRAs, and SIMPLE IRAs) you are allowed to aggregate for purposes of RMD. Regardless of how many IRA’s you have. You can then add up all of those RMDs and take that total RMD from any combination of those accounts. Please keep in mind that removing money from a SIMPLE IRA prior to 2 years from the date of first contribution can result in a 25% IRS penalty (even if to satisfy an RMD).
• If you have multiple 401(k) accounts, you are not allowed to aggregate. Meaning that you must take at least the RMD amount of each separate 401(k) account you have. Exception: If you are currently employed by a company, hold less than a 5% ownership stake, and actively contributing into the 401(k), the funds inside that 401(k) are exempt from RMD rules.
• If you have multiple 403(b) accounts you are allowed to also aggregate those 403(b) accounts. Like an IRA you can then add up all of those RMDs and take that total RMD from any combination of those accounts.
I’ve only outlined a few of the more common qualified retirement plans. As you can see, rules can vary between all of the different accounts.
A few weeks ago, I wrote about the options when separating service from an employer where you had a retirement account, outlining four items to consider. I intentionally left one item out -for this very reason: simplicity. Keeping retirement funds in one account can help simplify your financial life. Now, while we do not want all of our eggs in one basket (staying diversified), it’s easier to watch, monitor and track when they’re in one henhouse (one account).
If you’d like to find out more about me, have an idea you’d like me to write about or would simply like to contact me – visit my website: www.duane.wrfa.com.
Thank you for reading.
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Waddell & Reed does not provide legal or tax advice. Please consult with a professional regarding your personal situation prior to making any financial related decisions.
Duane Silbernagel is a Financial Advisor in Lincoln City, Oregon offering securities through Waddell & Reed, Inc., Member FINRA and SIPC. He can be reached at (541) 614-1322, via email at DSilbernagel@wradvisors.com.
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