Did you turn age 70-1/2 during 2016? While few adults spend much time thinking about half-birthdays, this particular one is important for retirement savers. The IRS wants to remind you that in most cases, you must start taking required minimum distributions (RMDs) from individual retirement accounts (IRAs) and workplace retirement plans by Saturday, April 1, 2017, if you passed the 70-year-and-six-month milestone during 2016.
The April 1 deadline applies to owners of traditional IRAs (including SEPs and SIMPLEs) -- but not Roth IRAs. It also typically applies to participants in various workplace retirement plans, including 401(k), 403(b), and 457(b) plans.
How do I calculate my RMD?
The RMD for any given year is the total account balance in your IRA, or IRAs, as of the end of the immediately preceding calendar year, divided by a distribution period. You can find the distribution period using the IRS' Joint Life and Last Survivor Expectancy Worksheet if your spouse is the sole beneficiary and is more than 10 years younger than you, or the Uniform Lifetime Worksheet for all other IRA owners. Both of these documents are available in Appendix B (Tables II and III, respectively) of IRS Publication 590.
Let's look at two scenarios, one for Jill and one for Jack, whose wife is more than 10 years younger than he is:
- Jill, born on Oct. 1, 1945, reached age 70-1/2 in 2016. Her required beginning date is April 1, 2017. As of Dec. 31, 2015, Jill's IRA account balance is $26,500. No rollover or recharacterization amounts were outstanding. Using the Uniform Lifetime Worksheet, Jill's distribution period is 26.5 years -- and the 2016 RMD that Jill must take by April 1, 2017, is $1,000 ($26,500 / 26.5).
- Jack, born Oct. 1, 1945, reached 70-1/2 in 2016. His wife (the sole beneficiary of his IRA) turned 56 in September 2016. Jack must begin receiving distributions by April 1, 2017. Jack's IRA account balance as of Dec. 31, 2015, is $30,100. Because his wife is more than 10 years younger than Jack and is the sole beneficiary of his IRA, Jack uses Table II in Appendix B. Based on their ages at year end (Dec. 31, 2016), the joint life expectancy for Jack (age 71) and his wife (age 56) is 30.1 years. The required minimum distribution for 2016, Jack's first distribution year, is $1,000 ($30,100 / 30.1).
The IRS notes that an IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner -- it often shows up in Box 12b on IRS Form 5498. For a 2017 RMD, this amount would be on the 2016 Form 5498 that the IRA trustee normally issues in January 2017.
It's a good idea to check this calculation yourself. You can do so using an online calculator such as FINRA's RMD calculator.
Common IRA-related RMD questions
RMD rules can be complex, especially with respect to beneficiary distributions and the correction of miscalculations or missed RMD obligations. For this reason, you may want to consult with a tax professional, especially if this is the first time you are taking a distribution.
Fortunately, some of the most common RMD questions related to IRAs have fairly clear-cut answers. Here are some answers to frequently asked questions:
What are required minimum distributions?
RMDs are minimum amounts that you must withdraw annually from your traditional IRA, 401(k), 403(b) or other retirement savings plan once you've reached the mandatory age for making withdrawals. IRS rules mandate that you take your first RMD by April 1 of the year following the calendar year in which you reach 70-1/2 years of age. For each subsequent year after you begin taking RMDs, you must withdraw your RMD by Dec. 31. Note that the amounts you withdraw typically count as taxable income unless you already paid taxes on your contributions.
Example: You turned 70½ on July 15, 2016. That means you must take your first RMD (for tax year 2016) by April 1, 2017. You must take your second RMD, for 2017, by Dec. 31, 2017, and your third RMD, for 2018, by Dec. 31, 2018 -- and so on.
Can I withdraw more than the minimum required amount?
Yes. However, be aware that the amount of your RMD, as well as any amount that exceeds the RMD, will be considered taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions from designated Roth accounts).
If I do take more than the minimum amount, can a distribution in excess of the RMD for one year be applied to the RMD for a future year?
Can I just take the RMD from one account instead of separately from each account?
This one's a little tricky. If you are a traditional IRA owner, you must calculate the RMD separately for each traditional IRA that you own, but you can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts. However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, must be taken separately from each of those plan accounts.
Do I have to take an RMD if I own an annuity?
The answer depends on the type of annuity you own. If you own a variable annuity, and it is held in an IRA, the answer is yes. This is referred to as a "qualified annuity" by the IRS, meaning that it likely was funded with pre-tax money that requires you to pay taxes on your withdrawals, as well as take RMDs. Non-qualified annuity contracts offer tax-deferred growth of after-tax funds; they are taxed when annuitized, but as a general rule are not subject to RMDs. (For tax treatment of qualifying longevity annuity contracts (QLACs), see the IRS Bulletin on longevity annuities.)
What if I don't take any distributions, or if the distributions I take do not meet the RMD amount?
You may have to pay a 50% excise tax on the amount not distributed. That's one very good reason why you don't want to miss the April 1 deadline.
To receive the latest Investor Alerts and other important investor information sign up for Investor News.