Have an IRA? Here’s your RMD guide

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Q. Are the rules about Required Minimum Distributions (RMDs) only for when you turn 70 ½? What do you have to do? And are there other times you have to take the RMD?
— Investor

A. The rules for RMDs from an IRA are complicated, and we’re glad you asked.

Making an error can cost you a lot in penalties.

For most individuals, the RMD rules apply starting in the year you turn 70 ½, said Roy Williams, president of Prestige Wealth Management in Flemington and Millburn.

He said the amount of the RMD is mandated based on tables from the IRS. 

Williams said there are a few different tables – depending on your age and your spouse’s age – but for the most part people will use the Uniform Distribution Table.

“You do have the option to defer your first RMD and take two in the second year,” Williams said. “You would do this if for some reason you had high income in the year you turn 70 1/2 but expect to have much lower income the following year.”

Typically, Williams said, the custodian who holds your IRA or 401(k) will calculate the amount of your RMD for you. The amount is based on the previous year’s ending account balance divided by the factor in the applicable IRS table based on your age.

He said in the first year, the RMD comes out to about 3.5 percent of your previous year’s ending IRA or 401(k) balance.

And if you’re an active employee, you do not have to take an RMD from your 401(k) as long as you do not own more than 5 percent of the company sponsoring the plan.

“Required Minimum Distributions will be taxable as ordinary income so you will be required to pay federal income taxes as well as state income taxes, depending on applicable state tax laws,” Williamsn said. “Most people will have these taxes directly withheld from the distribution but you can also make estimated payments throughout the year.”

You should talk to your tax professional about which is best for you.

There are other times you must take an RMD.

“If you inherited an IRA and you were not able to combine it with your own IRA – only available to spouses – you will start taking RMDs based on your single life expectancy, which is determined by your age in the calendar year following the year of death and reevaluated each year,” Williams said.

Note that while you are only required to take RMDs from your own pre-tax/traditional IRAs and 401(k)s, if you inherit a Roth 401(k) or IRA, you are required to take an RMD from the account but it will not be taxable, Williams said.

“With the recent changes in the federal tax laws many RMD taxpayers are choosing to use their RMD to make charitable contributions, reducing their taxable income directly from their RMD rather than using as an itemized deduction, which many taxpayers will no longer use,” he said.

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