Are You Ready? Required Minimum Distribution Follies (Part 1)

This is Part 1 of Minimum Distribution Follies. Part 2 is here.

When you get close to the Required Minimum Distribution age, you need to be ready to know how to calculate what your RMD number is.

The following is my take on all of this. You always should get professional advice. But here goes…

Are you ready for this?
First, you need to know at your birth month. We can assume everyone knows their birth month. The IRS uses your birth month as an important factor in determining when you need to calculate and when you need to withdraw your RMD.

What does this mean?
You add six months to your 70th birthday. This is the time you turn 70-1/2.

Why is this important?
The first RMD calculation is based on your tax deferred account balances as of December 31 the year prior to turning 70-1/2. The age 70-1/2 is exactly six months after your 70th birthday.

What difference does it make?
People born on or before June 30 must calculate their first RMD withdrawal in a different year than those people born July 1 or later of the same year.

Let’s take an example.
Let’s say there is a married couple named Mister and Missus, and they were both born in the same year. Both worked, so they both have some IRA and 401k accounts.

Mister was born June 30, 70 years ago, and Missus was born July 1 of the same year. So they were born one day apart.

But from the point of view of the IRS, they must calculate their first withdrawal from different years.

How is this possible?
Well, the IRS rules say that your first RMD calculation (note that I did not say withdrawal; withdrawal date discussion below…) is based on when you turn 70-1/2.

Mister will reach the date he turns 70-1/2 the same calendar year he turns 70, because June 30 plus six months is December 30 of the same year. He must calculate his RMD amount from December 31 of the previous year, namely the end of the calendar year he had his 69th birthday.

So Mister needs to add up all his tax deferred account balances as of December 31 of the calendar year he turned 69, and calculate his first RMD from that amount.

But.
Missus has her 70th birthday on July 1. So she reaches 70-1/2 on January 1 of the following year, the same year in which she will reach 71, because July 1 plus six months is January 1.

So Missus’s first RMD calculation occurs from her tax deferred accounts as of December 31 of the calendar year in which she turned 70.

What Does this All Mean?
It means that Mister will have his first RMD calculation one year before Missus.

By when do you need to withdraw the RMD money?
There’s an exception for the first RMD. All years except the first year, you need to withdraw the funds on or before December 31 of the year after the December 31 calculation.

Why is the first year different from all other years?
You are asking why. Why? Why? I have wondered that myself. Maybe there is a why. Maybe there isn’t.

Timing of Withdrawals of RMD Amount from Accounts.
As mentioned, in all years except the first year, you need to withdraw the RMD amount by December 31 of the year after each December 31 calculation.

But the first RMD can be postponed until April 1 of the “following” year. Which means that the first RMD withdrawal for Mister can be delayed until or before April 1 or the year he turns 71. And the first RMD withdrawal for Missus can be delayed until or before April 1 or the year she turns 72. But if you postpone, that would mean two RMDs in the same year: more money, more taxes.

What do you mean “two RMDs on one year”?
This is only if you postpone. There is no requirement to postpone. In fact I wouldn’t. It is entirely normal to not postpone it. But let’s look at the examples.

Effect of postponing first RMD.
Mister makes his first RMD calculation as of December 31 in the calendar year he turned 69. So, if he postpones, he can withdraw that first RMD amount anytime from January 1 of the calendar year he turns 70 until April 1 of the calendar year he turns 71. But of course, he also needs to make his second RMD calculation as of December 31 of the calendar year he turns 70. That second RMD amount must be withdrawn sometime between January 1 of the calendar year he turns 71 and December 31 of the same year (the year he turns 71). So as you see, since he postponed his first RMD, he must take two withdrawals the year he turns 71. Therefore, unless there is some very unusual circumstances that I cannot dream up, I would avoid this postponing.

The effect of postponing for Missus is the same, except her RMDs started a year later. For completion’s sake here is her situation if she postpones:

Missus makes her first RMD calculation as of December 31 in the calendar year she turned 70. So, if she postpones, she can withdraw that first RMD amount anytime from January 1 of the calendar year she turns 71 until April 1 of the calendar year she turns 72. But of course, she also needs to make her second RMD calculation as of December 31 of the calendar year she turns 71. That second RMD calculation must be withdrawn sometime between January 1 of the calendar year she turns 72 and December 31 of the same year (the year she turns 72). So as you see, since she postponed her first RMD, she must take two withdrawals the year she turns 72.

How Much is the RMD amount?
RMD amount is calculated by using an IRS chart. The first year’s amount is 1/27.4 of the total amount in all tax deferred accounts as of whichever December 31 you determine is correct for your 70-1/2 determination. 1/27.4 is about 3.65%. The amount changes each year, the second year it is 1/26.5 ( about 3.77%) of the remaining balances as of the following of December 31. Here is the IRS chart:
https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

So Far So Good?
My head was spinning the first few times I tried to understand all of this. Needless to say, having all this calculated for you by the custodian company (plan administrator) where your IRAs and/or 401ks are located is likely the best choice. I have spent too much time on the phone with custodian companies to get this far in my understanding.

About using your IRA/401k custodian company for help.
Some custodians, in addition to helping you calculate your RMD amount, will allow you to set up monthly withdrawals. Namely, they will direct deposit the 1/12 of your RMD amount each month into your bank account. This is a great feature to take advantage of if available.

And Beware of Penalties!
Here is a helpful quote from the IRS website:

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.” https://www.irs.gov/retirement-plans/rmd-comparison-chart-iras-vs-defined-contribution-plans

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.

However, I found the following additional helpful insight at the IRS website:

Who calculates the amount of the RMD?
Although the IRA custodian or retirement plan administrator may calculate the RMD, the IRA or retirement plan account owner is ultimately responsible for calculating the amount of the RMD.” https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions

My point.
Usually I like to do things on my own. I re-balance my portfolio when I feel like it. I cook my own breakfast. I put on my own socks. But there are some things I defer to others. Like income tax; even though I input the numbers at online tax preparation website to calculate taxes, I don’t want to paw through those IRS forms myself.

RMD is another one of those things, in my view, that getting help from people who are in the business of doing it often is probably best.

This is Part 1 of Minimum Distribution Follies. Part 2 is here.

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