Understanding minimum distribution rules

March 28th, 2011 Kevin Mote

If you’re approaching retirement, you’ll eventually need to make serious decisions about when to begin taking withdrawals (known as distributions) from your retirement accounts, how to receive the money and how to calculate the taxes you’ll owe.*

Fortunately, the rules governing required minimum distributions (RMDs) have been simplified in recent years. Nonetheless, you should exercise caution to ensure that you’re following the rules correctly.

The basics

Many people begin withdrawing funds from their IRA and 401(k) soon after they retire. Before age 70½, when and how much you withdraw is your decision. After that, failure to withdraw the so-called RMD amount each year may result in substantial tax penalties to the tune of 50 percent of the amount that you failed to withdraw.

For example, if your RMD was $20,000 and you only withdraw $15,000, your penalty will be 50 percent of the $5,000 that you didn’t withdraw.

For IRAs, you must begin taking RMDs no later than April 1 following the year in which you turn 70½. The same generally holds true for 401(k)s and other qualified retirement plans. However, RMDs from a 401(k) can be delayed until retirement if you continue to be employed by the plan sponsor beyond age 70½ and you do not own more than 5 percent of the company. If you have a Roth IRA, you are not required to take distributions at any age. In addition, the minimum distribution rules do not apply to annuities funded with after-tax dollars.**

What if I have multiple accounts?

Your RMD for a particular tax year is based on the total of all your qualified plan assets (e.g., IRAs and 401(k)s if you’re no longer working for the company).

In addition, you are not required to take RMDs from each account in an amount that’s proportional to each respective account’s value. Simply put, you can decide which accounts you want to take money from, as long as you remove enough in total to cover your RMD for that year.

One way to simplify the RMD process, as well as gain better control of your various retirement accounts, is to consolidate them into one rollover IRA. By doing so, your retirement assets will be in one place, and the management of those assets is consistent with your needs and goals.

Next steps

A good starting point for understanding the RMD rules is to take a closer look at the IRS Publication 590. It’s available for free at the IRS website or at your local IRS office.

Should you have questions, let us know, and we’d be happy to help you determine your RMD amount as well as help you develop an investment strategy that makes sense for you.

*Withdrawals will be taxed as ordinary income tax rates. Withdrawals before age 59½ may trigger a 10% penalty tax.

** Annuties are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax and surrender charges may apply.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate to you, consult your financial advisor prior to investing.

Securities offered through LPL Financial, Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates.

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Kevin Mote

About the author

Kevin Mote is a LPL Financial Advisor at MidWestOne Bank. He specializes in investments and retirement planning.

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