Happy April, Happy Holiday weekend, Happy Spring!
Want to relay a an item of financial importance (no joke!) today for those who turned 70 between July 1, 1946 and June 30, 1947.
Today, April 1st is the deadline for those who are 70 1/2 or older to start taking required minimum distributions (RMD’s) from their traditional IRA’s, 401K’s and other retirement accounts. There are approximately 3.3 million Americans who turned 70 1/2 during 2017. A special extension gives them until April 1 of the following year to take out a certain amount from their eligible retirement accounts. To ensure people begin their withdrawls, there is a 50% penalty of what you should have withdrawn if you miss the deadline. Today is the day!
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The RMD rules therefore make you start taking out certain amounts starting when you reach age 70 1/2. So if you were born between July 1, 1946, and June 30, 1947, then you’ll have to take out that appropriate amount by April 1. Thereafter, the deadline becomes Dec. 31, so you’ll have even less time to avoid the penalty in future years.
How much money is enough?
If you aren’t sure about what your RMD requirement is, the IRS provides a worksheet (opens a PDF) you can use to make the necessary calculations. Things to consider: your life expectancy as defined on the IRS uniform life table that’s part of the worksheet and what the value of your retirement accounts as of the end of December 31st, 2016. The calculator will tell you what your RMD must be to avoid the 50% penalty.
For planning purposes, the RMD amounts vary by age, according to the table. As of today, from ages 70 to 72, you have to withdraw less than 4% of your total balance. By age 79, the amount is 5%, and it takes until age 93 before your RMD tops the 10% level. It is wise to check on this annually, in case of changes.
Special rules
There are some special rules that you should know about before finalizing your retirement account withdrawals. First, there’s no penalty for taking more than your required minimum distribution. At 70 1/2 or older, you’re well above the 59 1/2 minimum age to take penalty-free withdrawals.
Also, not all retirement accounts are subject to RMD rules. Roth IRAs have no requirement for minimum distributions. Some retirees start taking greater advantage of Roth IRAs by converting traditional IRA and 401(k) assets to Roths earlier in retirement, setting up a nest egg over which they have complete control with respect to timing of withdrawals. Such conversions are almost always available, although be aware of the tax “hit” upon conversion. You will pay income tax on the amount of money converted to the Roth during the year of conversion.
The Living Planner proactively helps you assess your business and personal situations. We explore ways for you to protect what is important to you by asking questions and exploring with you. When you’re ready to explore how to be ready, we’re here for you.
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