Don't Forget Your RMD!

What is a RMD?

If you are over 70 1/2 and have a traditional IRA, an inherited IRA or other IRA-based plan such as a SEP, SARSEP, or a Simple IRA, then you are required to make a minimum withdrawal every year.  This is known as your required minimum distribution or RMD.  This also applies to employer-sponsored plans, including profit sharing plans, 401(k) plans, 403(b) plans and 457(b) plans.  Your withdrawal needs to be taken by December 31st with one exception.  Your first RMD can be delayed until April 1 (not the 15th) of the following year.  In your first year, if you elect this deferral, you will need to make another withdrawal before Dec 31 for the current year.

What happens if I don't take my RMD

If you are subject to a RMD and fail to take it, or fail to withdraw the full RMD, or if you miss the deadline, the amount not withdrawn is subject to a 50% penalty!  Yes, you read that right, a 50% penalty!  That's the bad news.  The good news is the IRS may waive the penalty for you if you can show that the shortfall was due to "reasonable error" and that the proper steps are being taken to fix the omission.  When you file your taxes, you would need to fill out IRS form 5329 and attach a letter of explanation.

How is the RMD calculated

IRA custodians are required to calculate your RMD and you have many choices on how to receive them.  Sometimes these calculations are made with certain assumptions that may not be the most beneficial for your personal situation.  A RMD is calculated for each account by dividing the prior December 31st balance by a life expectancy factor from an IRS table.  As with most IRS rules, you have a few different ways that the RMD can be calculated.  There are 3 different IRS tables that you can use and all will come up with a different amount. 

A few more considerations:

• If you have multiple retirement accounts, you can take your RMD from one or all of your accounts as long as the the total RMD for all of the accounts is withdrawn.
• You don't have to take your RMD all at once.  You can set up systematic withdrawals, take out money as needed or you can wait until the end of the year. 
• In individual retirement accounts, your withdrawal doesn't have to be in cash.  If there is a security in your account that you like and don't want to sell, you have the option of receiving your withdrawal in-kind.  (this may not be possible in employer-sponsored plans)

Unless you are absolutely certain (remember the 50% penalty) that your RMD has been calculated correctly, we highly recommend that you discuss your situation with your CPA, tax preparer and/or your financial advisor.  If you are a "do it yourself-er", here is the link to IRS Publication 590.  You will find the rules, worksheets, and tables there.  Let us know if we can be of any assistance.