Helping Participants Understand RMDs

In the retirement plan business, we naturally focus on helping clients accumulate wealth. But at some point we turn our attention from accumulation to decumulation. After all, everyone will reach the age at which they no longer contribute to their accounts and begin to withdraw money from them to sustain their lifestyles beyond their working years.

At age 59 and a half, it’s permissible to withdraw money from a qualified retirement plan or IRA without penalty and simply pay ordinary income tax on the taxable portion of the withdrawal. Most people, of course, not only work well past that age, but also postpone making such withdrawals until later in life in order to save more and give their contributions and earnings more years to grow.

At age 70 and a half people participating in a retirement plan or IRA come to another milestone: the age threshold for Required Minimum Distributions or RMDs for short.

RMDs generally work this way: Once you hit 70 and a half you need to withdraw a fraction of the value of each of your retirement accounts in either a lump sum or in installments by December 31st each year. The IRS does give a little relief until April 15th of the following year to get this done, but only for the very first year. The amount of the withdrawal is based on published mortality factors. And even though investment companies or recordkeepers may provide information or services to help, it’s the individual’s responsibility to calculate their RMDs each year. After all, service providers may not know about other investments or retirement plan accounts a person may have.

Here are a few quick facts to know about RMDs:

[1] RMDs need to be calculated from all traditional IRAs, but the total annual withdrawal can be made from one or more of them. It’s not necessary to withdraw money from every account.

[2] It’s OK to withdraw more than the minimum required amount each year, but doing so doesn’t change requirement for the following year.

[3] It’s also not permitted to take an RMD and roll that into another tax deferred account.

[4] And, if you are wondering if there’s a penalty for not making required minimum distributions  – there is – and it’s pretty steep. The IRS imposes a penalty of 50% on the amount that should have been withdrawn that wasn’t. And that still leaves the taxpayer with the responsibility to withdraw that amount and pay ordinary income taxes on it.

There are a couple of important exceptions to the RMD rules to keep in mind:

[1] Someone 70 and a half who is employed by a company with a 401K may continue to participate in that 401K without needing to make RMDs until they leave the company. This is true unless they own 5% or more of the company. If they do own 5% of the company, the RMD rules apply at 70 and a half.

[2] And while RMD rules apply to traditional IRAs, they do not apply to Roth IRAs.

As a financial advisor, you never know when questions about RMDs may come up. Don’t hesitate to reach out to us for more information when you need it. We’re here to help.