The government always wants its cut. So if you’ve been saving up for retirement and have reached the age of 70 and 6 months, you now face the monster of Minimum Required Distributions. All that money that grew inside your 401(k) or IRA or 403(b) or SEP-IRA or SIMPLE IRA account was tax-deferred, not tax-free. And now it’s time to pay the government its share. (The one exception is Roth IRA’s which have no required withdrawals.)
Even if you don’t need the money because you are still working or have other assets outside your retirement accounts, the government demands that you withdraw a certain amount of money every year, according to a complicated formula, starting in the year after you reach age 70 and 6 months. And there are huge penalties if you fail to make the correct distributions.
The withdrawal formula is based on life expectancy tables. The amount to be taken out each year is designed to make sure you draw your accounts down to 0 at the point the government assumes you will die. Here are three important points to make up front, before getting into the rules for MRD’s.
First, just because you take the money out, doesn’t mean you have to spend it! Your lifespan could be longer than the government’s actuarial tables. So you might need more money later in life. Paying the taxes on the withdrawals and then saving the cash or investing it if you don’t really need it, is probably a good idea.
Second, you might not live as long as the government tables predict. So you should make sure that each and every retirement account has a named “beneficiary” — the person who gets the money if you die before it is all withdrawn.
And, finally, you can always take more money out if you need it. But the idea of MRD’s is to make sure that the money gets taxed before your death!
Withdrawal Rules
Fortunately, almost every IRA custodian will do the withdrawal calculations for you. Or you can do it yourself using the IRS’s Uniform Lifetime Table. (http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Required-Minimum-Distributions-(RMDs)) (There is a separate schedule if your beneficiary is a spouse who is 10 years younger than you are.)
To get the appropriate amount for your withdrawal, you must total up the market value at year-end of the previous year of ALL your IRA’s in order to get the correct amount. Be sure to give any one IRA custodian this total amount, so they can do the calculation for you. Then you can withdraw the money from one or several of your accounts.
When to take the RMD is up to you. If you haven’t done it already for this year, time is running out. You’ll have to take it all at once before Dec. 31. You don’t have to have all your retirement accounts with them, but they will need to know the year-end balance in your accounts. Be sure to keep that documentation in the form of year-end statements.
Getting Started
The first year is the most difficult. You must start taking distributions in the year after the year in which you reach age 70 and 6 months. So think about your birthday — and count ahead six months. You must take your first distribution by April 1 of the year following that date.
For example, suppose your 70th birthday was June 30, 2014. You will reach age 70 and 6 months on Dec. 30, 2014. You must take your first RMD (for 2013) by April 1, 2015. But if your 70th birthday was Aug. 1, 2014, you turn 70 and 6 months in 2015, and then you have until April 1, 2016 to take that first distribution.
However, waiting until April 1 of the following year to take your first distribution can result in requiring TWO distributions in that initial year — the initial one, and the one that must be taken for that year by Dec. 31. That could be a problem if the withdrawals push you into a higher tax bracket or result in a bump in income that impacts what you pay for Medicare premiums or other programs. Start tax planning early.
Market Timing Considerations
You also have to consider the investment outlook. Are you better off taking the withdrawal in January, based on year-end balances? What if the stock market moves higher and you don’t have that money working for you? Or, even worse, what if the market falls — and you are required to take a percentage of the money you had at year end last year?
You can avoid this issue of market timing by setting up a program of automatically deposited monthly distribution checks from your custodian.
Before you wring your hands at the complexity of it all, consider that you are among a relatively small percentage of Americans who have saved enough money for retirement to need these calculations. In other words, this is a relatively good problem to have. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast, and can be reached at www.terrysavage. com. She is the author of the new book, “The New Savage Number: How Much Money Do You Really Need to Retire?”