Required Minimum Distributions: Pay or Else
The beauty of investing in retirement plans is the tax deferred growth. All these years you’ve seen your account grow but never had a 1099 you had to report any of those gains on. You planned well enough were you have prolonged withdrawing even longer now, but you can only hold out for so long. The IRS is chomping at the bit waiting to get some of that tax money back. They do so with RMD’s by making you take out a portion of your retirement account each year and pay the respective tax on it. If you don’t take it out, you get taxed 50% of the amount that you should have taken. That’s a pretty stiff penalty that you want to avoid.
When do RMD's have to start?
The IRS says you must start by April 1 following the year that you turn 70 and a half, and you must do it each year ongoing. Some retirement plans will allow you to postpone withdrawing so long as you are still employed by that company. Keep in mind that April 1 is for the first year and the first year only. After the first year, it falls back to a calendar year schedule and must be withdrawn by December 31.
RMD Example
Somebody born on July 1, 1938 would not turn 70.5 until January 1, 2009. That means that they would not have to take their first RMD until April 1, 2010 (which would satisfy 2009 RMD requirement). They would, however, be required to take another distribution that year by December 31, 2010 to satisfy for that year. Each year following would follow the December 31st deadline.
How much do you have to take for RMD's annually?
The amount will also be based on the previous year’s balance in your retirement plan. For example, to figure your RMD for 2008 you would take the value of your plan as of December 31, 2007.
The amounts to be withdrawn are based of life expectancy tables issued by the IRS which factor in your age, your beneficiary’s age, and your relationship with your beneficiary. Based on the 2008 Uniform Life Expectancy Table, you can expect to be required to withdraw 3.65% of your retirement plan when you turn 70.5. It then increases to 3.77% the next year and increases each year ongoing. The IRS tables are named:
* Single Life Expectancy
* Joint Life and Last Survivor Expectancy
* Uniform Lifetime
The tables are helpful, but nowadays calculators are used to compute the amount with ease. Please seek guidance from a financial professional to ensure that you are taking your RMD’s correctly.
About the Author: Jeff Rose started his career
as a financial advisor with A.G. Edwards & Sons in 2001 out of
Carbondale, Illinois. Always excited to meet new people and having a
unique interest in the financial markets, being a financial advisor was
the perfect fit for Jeff’s career.
In January of 2005, 4 years into his career, Jeff’s National Guard unit
out of West Frankfort, IL was called up to support Operation Iraqi
Freedom. Acquiring the rank of Staff Sergeant, Jeff served as Squad
Leader while conducting military police maneuvers in central Baghdad.
Anticipating his return, Jeff attained the Chartered Retirement
Planning Counselor designation between mission and duties during his
downtime in Iraq. Due to countless prayers, Jeff safely returned home
March of 2006.
Picking up right where he left off, Jeff resumed his career as a
financial advisor. His goal was to be the “complete package” advisor,
wanting to assist in all areas including: investments, insurance,
taxes, and estate planning. The next step was to become a CERTIFIED
FINANCIAL PLANNER™ practitioner, which he did in November 2007. An
individual who has earned the CFP® mark of distinction has met the
education, examination, experience and ethics standards established by
the Certified Financial Planners Board of Standards (CFP Board).
In December of 2007, Jeff and three others formed Alliance Investment Planning Group LLC.
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