How to Avoid a HUGE Penalty from Missing the Required Minimum Distributions (RMD) from IRA.
Failure to withdraw an RMD by the deadline results in one of the most onerous penalties in the tax code! 50%. That’s right! If you were supposed to take out a minimum of $4,000 and- oops!- did not do so. You have the privilege of writing the IRS a check for $2,000.
What is the Required Minimum Distribution?
The Required Minimum Distribution (RMD)? It is an annual distribution the government forces people to take out from certain individual retirement plans. These include: traditional IRA’s, IRA rollovers SIMPLE IRA’s and SEP IRA’s.
When are you required to being taking your RMD?
Turning 70 ½ in the same year of your birthday (have a birthday on June 30th or earlier in year). Then you are required to take a distribution. This is known as required minimum distribution by April 15th of the following year.
Perhaps you turned 70 in April. You would turn 70 ½ that same year and be required to take the distribution by April 15 of the following year. In that following year, you would also be required to take a distribution for that year as well and every calendar year after that. You can also take your RMD the same year that you turn 70 ½. Then you will not have two distributions the following year if you choose.
Lets say you turned 70 in the second half of the calendar year. You can put the distribution off by an entire extra year. For example, if you turn 70 on July 1st, 2017, you are not required to take a distribution until April 15th, 2019.
See the example worksheet below.
How is the money distributed taxed?
Any time you take money out of your IRA. The amount of never taxed money you withdraw is added to your tax return as “ordinary income”. You will receive a form 1099r, confirming the amount.
How is the Required Minimum amount calculated?
There is an IRS table that is available online, also included below.
To calculate your RMD, you will need to know the prior year-end balances from all of your IRA accounts. Once you know your total account balance. Then divide your balance by the appropriate (age based) factor in the table, to determine the amount of your distribution. The distribution can come from any combination of your IRA accounts as long as you make sure to take out the minimum. You can take it all from one account if you wish to do so. You are also free to take out as much as you want to each year over and above the RMD.
As you will notice from the table. The divisor in the table goes down each year which will mean that you will be required to take a higher percentage of your balance each year as you age.