Required minimum distributions, often referred to as RMDs or minimum required distributions, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans after you reach age 70½ (or, in some cases, after you retire). As the name implies, the withdraws are required or mandatory. Stated differently, you need to take the withdraw each year. You can always withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal penalty. The penalty is 50% of what you were required to take out less what you actually took out. So for simplicity, if your RMD is $10,000 and you only withdraw $1,000 you will pay a penalty of $4,500 ($10,000 – $1,000 = $9,000 x 50%).
The RMD rules are calculated to spread out the distribution of your entire interest in an IRA or plan account over your lifetime. The purpose of the RMD rules is to ensure that people don’t just accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. Instead, required minimum distributions generally have the effect of producing taxable income during your lifetime. Only Traditional IRAs and 401ks are subject to RMDs, Roth accounts do not have the same requirement.
One of the many shadow services we provide our clients is ensuring they always withdraw the correct RMD annually. We will review all your IRA accounts, not only those that we manage to ensure you are calculating the RMD correctly. This is important because your RMD is based on the value of all your IRAs, not just one.
Chesapeake Financial Advisors is a fee-only financial planning, investment advisory and tax planning firm with offices in Towson, Bel Air and Columbia, Maryland.