This week’s blog post topic is one I touched on briefly at the end of last year, required minimum distribution. It is something that applies to retirement or nonqualified accounts and comes up frequently with clients who sometimes misunderstand it. IRAs, 401ks and other retirement accounts are tax deferred accounts. Under tax laws, the government does not tax the interest and dividends earned in these accounts until they are withdrawn. This gives a boost to the value of these accounts since no tax paid means more money that can continue to grow.
Eventually, however, Uncle Sam does want to get its share. That’s where the required minimum distribution (RMD) comes in. RMD rules require that account owners must start making minimum withdrawals from their retirement accounts no later than when they reach age 70 and ½. These rules apply to most IRAs, such as SEP, SIMPLE, traditional, rollover and inherited IRAs. It does not, however, apply to Roth IRAs (no RMDs necessary) and some exceptions apply to certain 401ks.
The amount of RMD you must take is based on a formula. You take the value of your IRAs on December 31 of the previous year and then divide by a number that is based on your life expectancy. The IRS has created a worksheet to help you calculate this (see IRS Publication 590-B). The divisor is the number listed on the chart for the age you will be turning on your birthday in the year for which you are calculating the RMD.
Those are the basics. Next week we’ll get into a bit more detail and some of the trickier issues with RMD.