But wait! Why are you talking about RMDs now, in the middle of the year? It’s the year-end numbers that count!
Yes, that’s true, but it is never too early to keep in mind that RMDs are due every year after you hit age 70.5, and missing a withdrawal gets you a very big penalty.
Once one reaches 70-1/2, Required Minimum Distribution (RMD) is a fact of life. A withdrawal is required every year.
The IRS requires a certain percentage of funds be withdrawn from tax-deferred accounts annually to meet the RMD rules. The percentage increases over time. See previous RMD discussions, start here.
How to calculate your RMD
The calculation is based on the total amount of funds in all tax-deferred accounts as of December 31 of the year prior to the day one turns the required age to start RMDs. This age has changed several times; check the IRS website for the latest data.
One divides the total amount by the value in the Distribution Period column to determine the amount to withdraw. Or one can use a percentage.
For example, if on December 31 prior to the year in which one turns 70-1/2 in all of one’s tax-deferred accounts totaled $1,000.000.00, then the RMD amount is $1,000,000.00 divided by 27.4 which is $36,496.35.
Another way to calculate this is to take the inverse of 27.4 which is 0.03649635 or 3.649635%. So $1,000,000.00 times 0.03649635 is the same $36,496.35.
Personally, I round up the percentage amount, 3.649635%, to the next largest closest hundredth, so I use 3.65%. So I would calculate $1,000,000.00 times 0.0365% which is $36,500.00, a nice round number and just $3.65 more than the exact amount.
Why All This Attention To Detail?
And I thought retirement meant that I could let lots of detailed things slide away! Haha. Seems the IRS wants us to stay on our toes. Or else give us lots of chances to slip up.
The penalty for not taking out the RMD amount is extremely onerous. Don’t let this slide!
What happens if I do not take the RMD?
If the distributions to you in any year are less than the RMD for that year, you are subject to an additional tax equal to 50% of the undistributed RMD!
So do not put it off, do not let it slide. Withdraw from your account(s) the correct amount. Get help if you need it. Get help even if you don’t need it.
If your tax-deferred account[s] is/are at a custodian, which is usually the case, you have the possibility to ask them to calculate and withdraw the money to send you. You, of course, are responsible for getting the right amount withdrawn from your account[s].
How have you handled RMDs? Send a comment here.
The 1883 engineering illustration of a hot air balloon courtesy the American Association for the Advancement of Science.
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