When do I have to?

When do I have to withdraw from Retirement Accounts?

By: Andrew Rosen, CFP®, CEP®

At least once a week, I find myself educating a client on when they have to take money from retirement plans. Most people are confused on how this works. It’s kinda funny, actually.  We spend all this time accumulating money in retirement vehicles, yet many are relatively clueless on the requirements to withdrawal.

Most of us recognize at some point money must be taken out of these plans. The question most start with, however, is why. The answer is actually quite simple. You’ve deferred paying tax on these funds (for almost 50 years, in a lot of instances). Now, the government wants to get paid! Therefore, they have their way to get these dollars taxed once and (not necessarily) for all.

When do I have to take distributions?

For starters, you must take money out of your pre-tax retirement account(s) in the year you turn 70 and a half. This means things like Roth IRA’s don’t have a forced withdrawal age. Of course, there are a couple caveats to this; nothing is simple when the IRS is involved. Your first RMD can be taken the year after you turn 70 and a half, as long as it is by April 1st that following year. If you elect this option for your first RMD, you still have to take out your year-two RMD in that same calendar year, as well. (To be clear, this second option has you taking two RMD withdrawals in the same calendar year.)

If you have inherited an IRA from a spouse, and they are within 10 years of your age, you have two options. First, you could move the IRA into your name and take your RMD at your appropriate age. Option two is to leave it in your deceased spouse’s name and take at their age 70 and a half. Typically, it’s most advantageous to have it go into the younger spouse’s name to maximize tax deferral.

If you inherit an IRA and your spouse is 10 years older, or if it’s from a non-spouse, there is an entirely different RMD schedule by which you must abide.

How is my annual Required Minimum Distribution calculated?

For all the circumstances listed above, you must abide by the IRS life expectancy table. For purposes of this article, let’s focus on RMD calculations for yourself (rather than an inherited IRA). For starters, you must take the total investment value of all RMD eligible retirement accounts on December 31st of the year prior to your required distribution.  Sum them all together and you have the numerator in the equation of figuring out the current years RMD. 

For example, if you turn 70 and a half this year (2019) and the total account value of your eligible IRAs/401(k)s on 12/31/18 was $500,000, you use that figure. Than you take that dollar amount and divide it by the distribution figure below which is 27.4 for your first year.

$500,000/27.4= $18,248.17 or roughly 3.6% of the prior year balance. Every year this figure increases as you can see from the table below.

Here are two links from the IRS site to help you compute yourself. This link is for my engineers that like to do the math by hand, while this link is for the rest of us that like using calculators.

What if you forget to take your RMD?

Remembering to take your RMD when you are supposed to should be a high priority. If you don’t, the penalty can be very painful (50% tax on the money that was to distribute). It’s important to note, the IRS doesn’t care from which retirement accounts you take your RMD. If you have 5 different IRA’s, add the 12/31 previous year balances and make sure you pull those funds from any IRA prior to yearend.

Things worth noting.

You can give up to $100,000 worth of RMD withdrawals each year to a registered 501(c)(3) charity and avoid paying any taxes that year on those funds. Additionally, based on your 401(k) specific language and if you’re still working after the age of 70 and a half, you may be able to delay RMD’s on that employer sponsored plan until you are retired.

There you have it!

Hopefully this helped clear the air, as many wonder the same thing. While it has a few quirks, the calculation is quite simple. Most places that handle your investments (like ours) automatically calculate it each year and distribute it. Remember, places like us can only help if we know the whole picture; therefore, don’t hold back on our coordination of these retirement accounts.

Andrew Rosen

In his role as Financial Planner, Andrew forges lifelong relationships with clients. He coaches them through all stages of life and guides them to better achieve their life goals. For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Find out more about Andrew Rosen, CFP®, CEP®
Find out more about Kyle Hill, CFP®
Find out more about David Levy, CFP®

Financial planning and Investment advisory services offered through Diversified, LLC, a registered investment advisor. Securities offered through Securities Service Network, LLC, Member FINRASIPC .  Some associates of Diversified, LLC are registered representatives of Securities Service Network, LLC, a registered broker/dealer, 9729 Cogdill Road, Knoxville, TN 37932. (800) 264-5499.