Each year, we get questions about Required Minimum Distributions. We’ll call them RMDs from here on out.
What are they? When do I have to start taking them? How much do I need to take? Can I keep contributing to my retirement accounts if I’m still working? Let’s address these questions.
What is a Required Minimum Distribution (RMD)?
For certain retirement accounts (IRAs being the main culprit), you MUST begin taking a certain amount OUT of the account starting the year you turn 70.5. These accounts have been growing tax free for many years and now the government wants their taxes! Remember, with a traditional IRA, you got a tax deduction for the contributions you made, but all distributions in retirement are considered ordinary (taxable) income.
Do I have to take an RMD from all types of retirement accounts?
- Traditional IRA – Yes
- ROTH IRA – No
- SEP IRA – Yes
- SIMPLE IRA – Yes
- 401k – No, if you are still working for the company offering the 401k; Yes, if you have retired and no longer work there.
- Individual 401k – Yes if you own 5% or more of the business sponsoring the Individual 401k; No if you do not own 5% or more of the company and still work for the company.
How much do I need to take?
It’s based on the prior year end balance. You apply a “factor” to that amount and it gives you your RMD.
For example, let’s say your IRA had a $1,000,000 balance as of 12/31/2016 and you will turn 70.5 in 2017. The factor is 26.5. Therefore, your RMD for 2017 is $37,736 ($1,000,000 / 26.5).
You will do this every year once you turn 70.5 but the factor will change each year.
Can I keep contributing to my retirement accounts once I turn 70.5?
- Traditional IRA – No
- ROTH IRA – Yes
- SEP IRA – Yes, if you continue working for the company offering the plan. You are still required to take an RMD.
- SIMPLE IRA – Yes, if you continue working for the company offering the plan. You are still required to take an RMD.
- 401k – Yes, if you continue working for the company offering the plan.
- Individual 401k – Yes, if you continue working for the company offering the plan. You are still required to take an RMD if you own 5% or more of the company.
These are the basics of the RMD rules. Please seek help from us or your tax professional for a review of your specific situation. There are severe penalties if you don’t comply with the rules.