A critical date is approaching for those 70½ and older. Dec. 31 is the deadline for those with retirement plans to take their annual required minimum distribution, or RMD, from their accounts.
Also known as minimum required distribution, or MRD, this is the mandatory minimum yearly withdrawal that you must make from your traditional IRA and defined-contribution plans, such as 401(k)s or 403(b)s, starting in the year you turn 70½.
The IRS requires this because it wants its money after years of deferred taxes on the funds.
“In exchange for this tax deferral, you are required to take the money out and pay tax on it during your retirement years,” said Tom Murphy, certified financial planner at Murphy & Sylvest in Dallas.
If you don’t take the money out by the deadline, you’ll suffer dearly for it. The IRS penalty is 50 percent of the amount that you should have withdrawn.
“If you had a $10,000 MRD and you failed to take that $10,000, the IRS would be looking for a $5,000 penalty,” said Maura Cassidy, director of retirement at Fidelity Investments.
Simply put, the RMD requirement applies to any retirement account in which you’ve contributed tax-deferred money or had tax-deferred earnings.
It does not apply to Roth IRAs during the owner’s lifetime but does after the account owner’s death.
Beyond that, the rules regarding RMDs are complicated, so it’s a good idea to consult a financial adviser.
Generally, an RMD is calculated for each retirement account by dividing the account’s balance on the previous Dec. 31 by a life expectancy factor that the IRS publishes in various tables.
“For example, if you are 71 years old and your IRA balance was $100,000 on Dec. 31, 2013, you divide that amount by 26.5, making your 2014 RMD $3,773.58, which must be taken out of the account by Dec. 31, 2014,” Murphy said. “The IRS tables are designed to force all the money out of the retirement plans over your life expectancy.”
Your spouse’s age also is important when calculating your RMD, and it affects which IRS table you need to use.