minimum distributions can be confusing. Here are smart ways to go about it.
If you are one
of the millions of Americans with a retirement-savings account, three of the
most important letters in your financial life might be these: RMD.
They stand for
required minimum distribution, which is something that the nation’s baby boomers
now need to grapple with for the first time. It refers to an annual payout that
savers must take from their retirement kitty at a certain point, as required by
The first of
the boomers (people born mid-1946 through 1964) are just now hitting the age of
70½, when most will be required to pull money out of their 401(k)s and IRAs,
but there are a dizzying array of exceptions and deadlines regarding these
payouts. For example, some people who are still working at age 70½ don’t have
to start taking RMDs from a 401(k).
surprised at how complicated the process was for me—and I’m an expert,” says
Natalie Choate, a lawyer with Nutter, McClennen & Fish in Boston who turned
70½ last year.
questions savers are asking about withdrawal requirements, with answers that
draw on the expertise of Ms. Choate and another IRA specialist, CPA Ed Slott of
Rockville Centre, N.Y.
Why is age 70½ important?
It marks the
point when savers must begin taking required annual payouts from tax-sheltered
retirement accounts such as individual retirement accounts, Simple IRAs and SEP
IRAs. Such payouts are often required for 401(k), 403(b) and other workplace
plans as well.
Why are withdrawals required?
encouraged people to save for retirement by providing tax benefits for these
accounts, but lawmakers don’t want to shelter these savings forever. So users
often must withdraw at least a minimum amount every year after age 70½.
Do all retirement accounts have mandatory
withdrawals after 70½?
Most, but not
all. Under current law, there are no required withdrawals from Roth IRAs during
the owner’s lifetime. Roth IRAs are different from many other tax-sheltered
retirement accounts in that savers pay tax on the money they contribute. Then
the assets can grow tax-free and be withdrawn tax-free.
There’s also a
useful exception for employees who participate in workplace plans such as
401(k)s and are still working after age 70½. If these workers don’t own more
than 5% of the company and their plan doesn’t mandate payouts at 70½, then they
needn’t take required withdrawals from the plan until they retire.
In addition, if
this plan accepts rollovers of the worker’s other IRAs or other 401(k)s, then
those assets can typically be shielded from required payouts as well, until the
worker retires. Otherwise, those accounts will have required withdrawals after
How large are mandatory withdrawals?
For most people
they begin at about 3.6% of assets and rise with age—although they’re never
large enough to empty the account. The withdrawal percentage is lower for
savers whose spouse is more than 10 years younger and is the sole beneficiary
of the IRA.
percentage applies to an individual’s retirement assets as of the preceding
Dec. 31. In other words, a required withdrawal for 2017 is based on assets as
of Dec. 31, 2016. There’s no limit on withdrawals—for example, an IRA owner can
pull out as much above the RMD amount as he or she wants.
How do I figure the minimum withdrawal?
are required to compute this amount for savers, but they can make mistakes.
If you want to
double-check, the Internal Revenue Service gives tables for making the
calculation in Appendix B to Publication 590-B. In essence, savers take their
relevant retirement assets and divide it by a life-expectancy factor—which
changes slightly every year.
say a 72-year-old single woman had $400,000 of IRA assets on Dec. 31, 2016.
According to Table III, her factor is 25.6 years. So she divides $400,000 by
25.6 and learns that she must withdraw at least $15,625 in 2017.
What’s the deadline for taking required
payout is for the year a taxpayer turns 70½. This can be tricky, so we’ll use
two presidents as an example. For someone like Donald Trump who was born during
first half of 1946, the first withdrawal must be taken for 2016. But for
someone like Bill Clinton born in the second half of 1946, the first payout is
due for 2017.
For most years,
the deadline for taking the mandatory withdrawal is Dec. 31. But there’s a
grace period for the first payout, and the deadline is April 1 of the following
year. Thus, someone born in the first half of 1946 must take the first payout
by April 1, 2017, but for someone born in the last half of 1946, the initial
deadline is April 1, 2018.
who postpone their first withdrawal until the April 1 deadline risk triggering
a higher tax bracket, because they will have two payouts in the same year.
What’s the tax rate on withdrawals?
becomes part of the saver’s ordinary income and is taxed at those rates, not
lower long-term capital-gains rates.
If the saver
has after-tax money in a traditional IRA, then a portion of the required annual
payout is not taxable. Figuring this portion can be troublesome and requires
I have several IRAs and a 401(k) plan with
required withdrawals. Must the payout for each account come from that account?
causes much confusion. Each payout from a 401(k) plan must be figured
separately and taken from that account.
With IRAs, however,
the saver is free to take the required payout disproportionately. So he or she
can take a large amount from one IRA, a little from another and nothing from
others, as long as payments add up to the correct total. A good reason to take
uneven payouts might be that one account has more cash than another, or the
owner wants to drain a smaller IRA and close it.
But be sure to
avoid another common mistake in this area, which is when one spouse takes the
entire required payout for both spouses if each has IRAs. Instead, each partner
must take such payouts from his or her own accounts.
Must I take withdrawals in cash?
possible to take them “in kind”—that is, as stock shares or even a piece of
real estate. For an IRA owner who doesn’t plan to spend the money, this move
could help avoid commissions for selling and then repurchasing an investment.
But it can be complicated, so allow extra time and find out if the sponsor
The new “cost
basis” in the asset, which is the starting point for measuring taxable gain, is
the value on the date of the payout.
How should I time withdrawals?
This is a
matter of individual choice. Some savers opt for periodic payments similar to a
pension. Others take a lump sum late in the year to delay owing taxes. Retirees
often owe quarterly estimated taxes, so consider whether to have taxes
If a saver dies
without having taken the required payout for the year, there can be
complications for the person or people who inherit the IRAs. There’s still a
required withdrawal, but it goes on the heir’s tax return.
If I take more than the minimum payout one
year, can I apply the excess to my minimum payout the next year?
Required withdrawals are showering me with
taxable income I don’t need. Are there ways to lower them?
limits. Still-working employees older than 70½ may be able to forgo payouts
until they retire (see discussion above).
charitably minded savers often benefit by using IRA assets to make their
donations (see related article).
IRA owners can
also exclude up to $125,000 of assets from the base for computing required
payouts if they use the assets to buy “qualifying longevity annuity contracts,”
or QLACs. These are IRS-approved deferred annuities that don’t pay out until
the owner reaches age 85, and they help make sure savers won’t outlive their
For most years,
the deadline for taking the mandatory withdrawal is Dec. 31, but there’s a
grace period for the first payout.
IRA owner can convert IRA assets above the required annual payout to a Roth
IRA, which doesn’t require withdrawals during the owner’s lifetime under
The catch here
is the cost: Assets converted to a Roth IRA are taxable, and doing a conversion
can push the taxpayer into higher brackets. Whether the move is worth it
depends on individual circumstances.
Many people who
convert assets to Roth IRAs do so in increments over several years in order
minimize the tax bill. Often a good time to do such conversions is in the years
leading up to age 70½. If the IRA owner has retired and is in a lower tax
bracket, the cost of Roth conversions will often be lower as well.
What if I miss a withdrawal or take less
than the required amount?
The penalty is
50% of the amount not withdrawn. That’s stiff, but there’s often a remedy, says
Mr. Slott. Just withdraw the shortfall right away, file Form 5329 with the IRS,
and attach a short statement explaining why. You don’t need to pay the penalty
to do this.
Often the IRS
will forgive the penalty, he says, and filing the form also starts the clock
running for the statute of limitations. “I’ve seen this work in virtually every
case,” he says.
here for the original article from Wall