Required Minimum Distributions (RMDs) and Your Retirement Fund

After decades of making tax-free contributions to your IRA or 401(k), the government wants to ensure it gets to tax that money at some point. A Required Minimum Distribution (RMD) is a minimum withdrawal that you must make from certain retirement accounts every year, once you’ve reached the age of 70 ^1/2-years-old.

RMD Rules & Calculating Required Minimum Distributions

You should know that not every retirement account is subject to an RMD. Here are the instances when you must take a required minimum distribution:

• You own a traditional, SEP or SIMPLE Individual Retirement Account (IRA). Roth IRAs are not subject to and RMD because taxes have already been paid on the contributions.
• You own a 401(k) and are retired from the company that sponsors it.
• You are still employed by the company that provides your 401(k) and you own 5 percent or more of that company.
• RMD rules also apply to profit-sharing plans.

The deadline for the first RMD withdrawal is within the year the retirement plan participant turns 70 and 1/2, but can be delayed until April 1st of the following year (you must make withdrawals by December 31st in subsequent years). You are responsible for taking the appropriate minimum distributions or you will face heavy fines.

Calculating required minimum distributions involves dividing the value of the retirement account during the year prior by the participant’s life expectancy (also known as the applicable distribution period).

IRA/401(k) Beneficiary Required Minimum Distributions

In the unfortunate situation that a person dies before they are required to take an RMD, they should have a beneficiary (or several) designated.

1. The entire retirement plan amount must be distributed to the beneficiary within 5 years.
2. The entire retirement plan amount must be distributed to the beneficiary over the course of their life beginning no later than 1 year after the death of the original plan owner.

Distributions for Multiple Retirement Plans

If you have a few scattered IRA or 401(k) plans, here are some guidelines to help you better understand the RMD process:

• If you have multiple IRA accounts, you can add up the value of all your plans and take the required distribution amount from any one of the accounts.
• You can also take a small amount from each IRA account adding up to the total minimum distribution requirement if you own multiple accounts.
• If you own multiple 401(k) or 401(b) accounts, you must take the required distribution from each of your respective accounts when retired (it is advisable in this case to roll over multiple 401(k) accounts into a single IRA account).
• Remember that if you retire after age 70 and 1/2 and have a 401(k) plan, you do not have to take an RMD if your employer allows deferrals.

RMD Suspensions are Over

Congress passed a law that temporarily suspended required minimum distributions be taken for 2009 when markets performed so poorly in 2008. Many portfolios were at their lowest values, causing the government to issue the delay. RMDs are back in effect, however, so be aware if you have not taken your required distributions for the year.