If you have a retirement account and are turning 70 years old, you will have to make sure you abide by a few IRS rules.
The IRS requires that you start making Required Minimum Distributions at age 70 ½. If not, you will be hit with a 50% non-compliance tax penalty.
We will take a look into some of the details of how to avoid the RMD penalties on your retirement account distributions.
And if you happen to be younger than 70 and have invested money for retirement, read on as well. If you are lucky, you too can make your RMD.
What are RMDs?
RMD stands for required minimum distribution. In order to ensure that the Federal government gets its share of tax revenue from tax-sheltered retirement account, the IRS requires individuals who reach the age of 70 ½ to take a certain amount of money out of those retirement accounts every year.
Retirement accounts that are subject to RMDs are:
- Traditional IRAs
- Rollover IRAs
- Inherited IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k), 403(b) and 457(b)s
- Keogh Plans
Here is some good news – there are no Required Minimum Distributions for a Roth IRA. This does not apply if you inherited the account and RMDs are required for Roth 401(k)s.
When Do You Have To Take Your RMDs?
You are required to take your first Required Minimum Distribution no later than April 1 of the year after the year you turn 70½.
So in 2021 that would mean April 1, 2021 if your 70th birthday falls between from Jan. 1 through June 31 2021. If you turn 70 between July 1 through Dec. 31, 2021 then the due date is April 1, 2022.
Following that first distribution year, your RMD is due no later than December 31 of each successive year.
There is an exception to this, however. If you’re 70 or older, still working and own 5% or less of the company you work for, you can delay your RMD from a 401(k) until you retire.
One other thing to consider – you don’t want to wait until April 1 of the year after you turn 70½. If you do, you’ll have to take two distributions in the same year. And two distributions could elevate you into a steeper tax bracket and you will pay more in taxes.
What Amount Do You Have To Take With Your RMD?
To calculate the size of your Required Minimum Distribution you will in general take the amount of money in your retirement account and correlate that with the IRS’s life expectancy estimates.
So, if you are turning 70½ this year you will calculate the total of all your RMD-eligible accounts and then divide the total by the distribution period set by the IRS.
IRS Uniform Lifetime Table – visit the IRS site for more information
| Age | Life Expectancy | RMD as % of Account Balance | Age | Life Expectancy | RMD as % of Account Balance |
| 70 | 27.4 | 3.65 | 86 | 14.1 | 7.1 |
| 71 | 26.5 | 3.78 | 87 | 13.4 | 7.47 |
| 72 | 25.6 | 3.91 | 88 | 12.7 | 7.88 |
| 73 | 24.7 | 4.05 | 89 | 12.0 | 8.34 |
| 74 | 23.8 | 4.21 | 90 | 11.4 | 8.78 |
| 75 | 22.9 | 4.37 | 91 | 10.8 | 9.26 |
| 76 | 22.0 | 4.55 | 92 | 10.2 | 9.81 |
| 77 | 21.2 | 4.72 | 93 | 9.6 | 10.42 |
| 78 | 20.3 | 4.93 | 94 | 9.1 | 10.99 |
| 79 | 19.5 | 5.13 | 95 | 8.6 | 11.63 |
| 80 | 18.7 | 5.35 | 96 | 8.1 | 12.35 |
| 81 | 17.9 | 5.59 | 97 | 7.6 | 13.16 |
| 82 | 17.1 | 5.85 | 98 | 7.1 | 14.09 |
| 83 | 16.3 | 6.14 | 99 | 6.7 | 14.93 |
| 84 | 15.5 | 6.46 | 100 | 6.3 | 15.88 |
| 85 | 14.8 | 6.76 | 101 | 5.9 | 16.95 |
How to Calculate Your RMD
Here is an easy example using the table above.
Let’s say you have $100k in a traditional IRAs and are age 70. Using the table above, your life expectancy is another 27.4 years. So, dividing your total retirement account amount by 27.4, we get $3,650 that we need to withdraw to satisfy our RMD.
If you were 80 years old, your RMD would increase to $5,350 since the expected remaining lifespan is another 18.7 years.
Of course, there are exceptions to the rule.
If you’re married and your spouse is more than 10 years younger and will be your sole beneficiary, you can use the IRS’s “joint life expectancy” method to reduce the amount of your RMD.
Lastly, although you can certainly withdraw more than the required RMD, you can’t use the excess to meet the RMD requirements in the future. (Not cool!).
Taxes And Penalties with Your RMD
You can get a pretty hefty tax bill with a Required Minimum Distribution (RMD). This tax hit occurs because RMDs are taxed as ordinary income at your federal income tax rate. And to top it off you may owe state taxes on the money as well.
Some taxpayers over 70½ can find themselves subject to a 55% marginal income tax rate due to a combination of RMD income, Social Security benefits and capital gains. Whoa!
To avoid this, if it looks like your RMD will push you into a higher bracket, start taking the money out sooner rather than later.
Here is another way to avoid a big RMD-related tax bill. In your low earning years, start converting some of your traditional IRAs to Roth IRAs, which won’t be subject to Required Minimum Distributions and you can in effect control what tax bracket you are in during retirement by pulling a combination of taxed and non-taxed money. The reason for low earning years is to minimize you tax bill on the front end.
What if I don’t withdraw any money?
If you avoid your Required Minimum Distribution you could get slapped with the 50% penalty. Here is an example of how badly it could hurt:
If for instance you should have taken out $15,000 but don’t you could be made to pay $7500. Not so fun.
If you have a good excuse for not doing the RMD the IRS might be forgiving — the first time.
If you do miss the RMD deadline and have a reasonable excuse fill out the Form 5329 for RMD penalties and mail a waiver request letter with it, explaining what happened. Then withdraw out the required amount from your IRA as soon as you can. The IRS will let you know if your penalty waiver is granted or if you’ll owe it.
RMD Summary
So, there you have it, an explanation of what RMDs are and the taxes and penalties associated with it. The bottom line is that you should be prepared to take distributions from your retirement account once you hit 70 1/2 years old. If you don’t you will have to pay penalties that can add up quickly.
