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Required Minimum Distributions - What, When, Why

November 30, 2017

There are several ages that represent special milestones in your financial life. Age 70 ½ is one of those major milestones if you own an IRA, SEP IRA, SIMPLE IRA, or qualified retirement plan account. As we head into the end of the year, it’s important to ensure that you have taken your Required Minimum Distribution by December 31st if required to do so.


A Required Minimum Distribution (RMD) is an annual minimum amount that the IRS requires owners of IRAs, SEP IRAs, SIMPLE IRAs, and qualified retirement plans to distribute from their account(s).


The official date that you must begin taking your RMD is April 1st of the year following the year in which you reach 70 ½ years of age. However, we generally recommend taking your first RMD in the year you turn 70 ½ years of age to avoid having to take two RMDs in your first required year. You are not required to start distributions from your current employer sponsored retirement account if you are still working for the employer at age 70 ½ and not at least a 5% owner in the company.  These RMDs from your employer sponsored retirement account would begin when you retire.


Your RMD is calculated using a combination of your life expectancy and your account value(s) as of Dec 31 of the previous year. Therefore, if you were calculating your RMD for 2017 you would utilize the December 31, 2016 account value(s). Your RMD is taxable at your federal income tax rate and may also be subject to state and local taxes depending upon your state of residency.


If you fall into the category of those needing to take an RMD, it’s incredibly important that you take at least your required RMD amount each year and that you do so prior to December 31st. There are tax penalties for missed RMDs and RMDs that are not taken at the full amount. The penalty is 50% of the amount not taken.


It’s important to consider your RMD as part of your overall retirement income strategy.