When Do I Have To Take Money Out Of My IRA?
Some of the largest assets most Baby Boomers have are their retirement accounts which causes a lot of confusion around different retirement accounts. For an IRA, for the year you turn age 70 ½, you will have to take out your first Required Minimum Distribution or RMD. There are more rules to how you have to take out your first RMD as well as how much you will have to continue to take out. Don’t forget to take it out, otherwise you may pay a 50% penalty!
The First Year With Your IRA
The first year you can take out your RMD is the most confusing because they give you a little bit of a grace period if you don’t do it in the year you turn 70 ½. Your first RMD must be taken out of your IRA or retirement accounts by April 10th of the year following when you turn 70 ½. Beware, if you wait until the following year, you will have to take two RMD’s out in the same year. After the first year, you must take out your RMD by December 31st each year. To make it easy to understand, I will give you an example.
Randy turns 70 ½ on April of 2017. Randy must take his first required minimum distribution by April 10th of 2018. If he doesn’t, there is a 50% penalty. Now Randy must take his second RMD. His second RMD must be done before December 31st of 2018. So if Randy waited until April of 2018 to take his first RMD, he would then have to take another one before December 31st of 2018. A total of two RMD’s in the same year. Going forward, Randy will have to take out an RMD each year before December 31st.
The Problem With Taking 2 Distributions
What is the problem with taking two distributions in one year? There might not be for you, but the issue is you could be increasing your taxes because you took more out of your IRA in the same year. Not just taxes on your IRA, but it could increase how much your Social Security is taxed among other things. It is usually recommended to take out the first distribution by December 31st of the year you turn 70 ½.
After the first year, the RMD factor grows, which means you may have to take more out each year. The IRS has a table for you to follow for how much you must take out each year. Keep in mind, the Required Minimum Distribution counts for all retirement accounts you have yet to pay taxes on, such as a 401k, 403b, 457, etc. The exception to the rule with employer retirement accounts is that if you are still employed by the company holding your 401k or employer account, then you do not have to take out your RMD from that account. You still have to take out your RMD from your IRA or any other account not held by your employer that you are still working for.
Don’t Get Confused
Don’t get confused, you may have to take out an RMD out of several accounts, not just one. If have a 401k and an IRA, then you will have to take out an RMD out of each account. If you have several IRA’s, you will only have to take out of just one account. The IRS just looks at the total you have for each type of account to determine your RMD for each.
Do not fall behind, the penalty is steep. The penalty is 50%. Your financial advisor and tax advisor should be able to help you calculate what your RMD is and also provide solutions to reduce or mitigate if it becomes a tax problem for you. It is my belief that creating a retirement plan with knowing you may have RMD’s is one of the best strategies Baby Boomers can for the best chance of success in retirement.
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