Those born in the first year of the “baby boom” will be turning 70 ½ either this year or next year which means they will need to think about their IRA (Individual Retirement Account).
My old grade-school and high-school friend Bob was born in January of 1946; therefore, he turned 70 ½ in July.
I’m a little bit younger, having been born in November of 1946, so I turn 70 ½ in May of 2017. This means that Bob and I will have to begin taking required minimum distributions (RMDs) from our tax deferred accounts (IRAs and employer sponsored accounts such as the TSP).
The required beginning date for RMDs is April 1 of the year after the year in which an individual turns the age of 70 ½. Bob’s first RMD must be taken by April 1, 2017; mine will have to be taken by April 1, 2018.
After the first RMD, all subsequent RMDs must be taken by December 31; so if I delay taking my first RMD until April 1, 2018, I will have to take my second RMD on December 31, 2018. This might make more income be subject to a higher marginal tax rate. However, nothing stops me from taking my first RMD in 2017, the year in which I turn 70 ½.
So, what exactly is a required minimum distribution?
It is an amount of money that must be taken from most IRAs and other tax deferred retirement plans each year after participants reach the age 70 ½.
Why 70 ½? That’s the age that Congress decided was the time by which participants should begin taking money out. After all, Uncle Sam has been deferring taxes for years – he’s not going to wait forever to take his cut. The size of a required minimum distribution is based on the previous year’s account balance as of December and the participant’s life expectancy.
Life expectancy is determined (for the purpose of calculating your RMD) by IRS tables that can be found in IRS Publication 590B. Most people will use the uniform life expectancy table, which gives a life expectancy (distribution period) of 27.4 years for one who is age 70. Let’s say that you have $325,000 in your TSP and you are age 70; that would give you a required minimum distribution of $11,861.32, or $988.44 per month.
This article will look at RMDs from an Individual Retirement Arrangement (IRA), and a future article will consider RMDs from the Thrift Savings Plan.
All Traditional IRAs require that participants who are 70 ½ or older take a required minimum distribution each year. If you are retired and withdrawing money from your IRAs, it is likely that you are withdrawing more than the amount that is required. In addition, you are not allowed to rollover a required minimum distribution to another tax deferred account.
There is no requirement that you take RMDs from a Roth IRA.
If you fail to take a RMD there is a 50% penalty applied; 50% of the difference between what you should have taken out and what you actually took out. Most IRA custodians will notify you at the beginning of the year after the year in which you turned 70 1/2 that you must begin taking out your money by April 1; and how much it is that you are required to take.
You are allowed to aggregate your RMDs from IRAs. To do this, you would calculate your IRA RMDs separately, add them together and take the total RMD from any one (or more) of the IRAs. You cannot aggregate IRA and TSP RMDs. One more item, if you have an inherited IRA, you cannot aggregate distributions from it with distributions from IRAs that you established.
John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. Order your copy at shoplrp.com. Ask your human resources office to contact Federal Career Experts about pre-retirement training.