Understanding Required Minimum Distribution Rules
Planning for retirement automatically calls for a savings plan. Nobody wants to spend their retirement years in a struggle without enough funds to keep you going through the rest of your life. Luckily, the IRS gives you some incentives or motivations to save for your retirement by letting you save in a multiple of tax-advantaged accounts.
After saving, you must then understand the Required Minimum Distribution (RMD). The RMD comes with severe consequences if not well followed and it is, therefore, crucial that you take your time to understand it more and know when it applies and here are some points to guide you in that.
What Does Required Minimum Distribution mean?
This is the amount of funds that the tax law expects you to start withdrawing from the various savings accounts such as 401(k), TSP, and IRA accounts among others after reaching a certain age.
Why Does it Exist?
IRAs wants to get a portion of your earnings. If RMD did not exist, you might never even pay tax on some of your investments. You would probably decide to leave the saving accounts to your family or friends for inheritance without any tax taken from you. The goal of the RMD is to help IRS get their share.
When Should you Start Taking the Required Minimum Distributions?
Your first RMD should happen by 1st April of the year after reaching 70.5 years of age, but most individuals will start in the year when they reach that age. Take an example, if your birthday is in February. It means that you will reach 70.5 years in August. Your first distribution must occur in April the following year, but you could still decide to take it in the current year. The decision on whether to wait until the next year or take the distribution in the current year should be based on the option that offers the least taxes.
How Big Should the RMD be?
IRA provides a worksheet to help you determine your RMD, but generally, it starts at 3.6% and rises with your age. For those with a variety of IRA accounts, they must calculate the RMD separately, but the total amount can be withdrawn through a single account.
| age | Distribution factor | age | Distribution factor | age | Distribution factor |
| 70 | 27.4 | 86 | 14.1 | 102 | 5.5 |
| 71 | 26.5 | 87 | 13.4 | 103 | 5.2 |
| 72 | 25.6 | 88 | 12.7 | 104 | 4.9 |
| 73 | 24.7 | 89 | 12.0 | 105 | 4.5 |
| 74 | 23.8 | 90 | 11.4 | 106 | 4.2 |
| 75 | 22.9 | 91 | 10.8 | 107 | 3.9 |
| 76 | 22.0 | 92 | 10.2 | 108 | 3.7 |
| 77 | 21.2 | 93 | 9.6 | 109 | 3.4 |
| 78 | 20.3 | 94 | 9.1 | 110 | 3.1 |
| 79 | 19.5 | 95 | 8.6 | 111 | 2.9 |
| 80 | 18.7 | 96 | 8.1 | 112 | 2.6 |
| 81 | 17.9 | 97 | 7.6 | 113 | 2.4 |
| 82 | 17.1 | 98 | 7.1 | 114 | 2.1 |
| 83 | 16.3 | 99 | 6.7 | 115+ | 1.9 |
| 84 | 15.5 | 100 | 6.3 | ||
| 85 | 14.8 | 101 | 5.9 |
What are the Consequences of Failure to Take the RMD?
The tax lawmakers were serious when making this one, and there are serious penalties for those who fail to comply with the rules. If you fail to take out the full amount of your Required Minimum Distribution by the given deadline, you will be charged a 50% penalty on the amount that you were supposed to take out. Following the current tax rates, the penalty is always larger in each circumstance than the amount of tax you would have paid, had you decided to withdraw the required amount.
You should note that while RMD forces to take a particular amount out of your retirement accounts, you can still take more than that. It is better than facing penalties.
