Knowing Your RMDs

16 Feb 2015

Congratulations!! You’ve saved and saved and have built up a very nice retirement nest egg. Unfortunately for you, all your money was tied up in qualified plans. When you turn 70.5, the IRS wants some of your money….Well, in a way. Required Minimum Distributions (RMD) begin at 70.5 and there are certain pitfalls and common mistakes you should avoid. It’s a common belief in our industry that for many retired people today, the first time they ever touch their retirement money is for required minimum distributions. However, I believe that Generation X will have tapped into their IRA’s many years before they turn 70.5. Nonetheless, here are some items to know:

1) Currently, RMDs do not apply to Roth IRA’s…..I say currently though.

2) If you take too little out, the penalty from the IRS is 50% of what the RMD was to be AND you still need to take the full RMD….If, by chance this happens, the IRS does have a heart. Check out their site at www.irs.gov and look at Form 5329. Better yet, contact your CPA for help. If you demonstrate this was a simple oversight, often you can get the penalty waived. Again, discuss this with your tax preparer.

3) Missing the deadline: The RMD rules specifically say “You must take your first RMD by April 1st following the year you turn 70.5 (be sure to check the IRS website for more information). Again, discussions with your CPA can help avoid mistakes in the first year.

4) Using the wrong date: The total amount of the RMD must be the total value of all eligible accounts on 12/31 of the previous year, not the value of the date of the RMD withdrawal.

5) Using an inaccurate life expectancy amounts: As you get older, the IRS requires you to take more to take out of your IRA’s. For example, a male age 70 will need to take 3.65%, while a male age 80 needs to take 5.35% out.  Please refer to Department of the Treasury, Internal Revenue Service Publication 590 (2010) for reference.

6) Forgetting an IRA account or mismanaging the calculations: Although you need not make the RMD from EACH account, you do need to include EACH account in the calculation…And what about inherited IRA’s?

You see how confusing this can be!! I suggest you and your Financial Planner consult with your tax person to make sure this is done correctly, not only the first year, but every year thereafter. Careful planning and a useful RMD strategy can head off mistakes before they happen.

Good Luck!

Jeff Johnston, ChFC
Investment Advisor Representative

Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Premier Investments of Iowa, Inc. are not affiliated. Cambridge does not offer tax advice.

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Jeffrey Johnston

Jeff has over 30 years of experience in the investment industry. He currently holds his FINRA Serices 6, 63, 66, 7, 24 & 51 licenses with LPL Financial as well as his health and life insurance licenses.