As you approach retirement age, it is important for you to consider the proper time to take distributions from your qualified plans and IRAs. There are IRS’s restrictions on pre-mature distributions from your retirement accounts. On the other hand, there are requirements concerning distributions you must take. These distribution requirements were established to prevent you from accumulating funds tax free indefinitely.
In the case of a qualified plan in which you participate, you are required to begin taking at least minimum distributions starting April 1 of the year following the year in which you reach age 70 1/2 or retire, whichever is later. In the case of your IRAs, you must begin distributions starting April 1 of the year following the year in which you turn 70 1/2, regardless of whether you have retired.
Your required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year. These withdrawals are included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).
Calculating the required minimum distribution
The required minimum distribution for any year is generally calculated as the account balance at the end of the preceding calendar year divided by the appropriate distribution period from IRS tables.
Date that you turn 70½
You reach age 70½ on the date that is 6 calendar months after your 70th birthday. Therefore, if your 70th birthday is June 30, 2015, you will reach age 70½ on December 30, 2015. In that case, if you are retired, you must take your first RMD (for 2015) by April 1, 2016. However, if you are retired and your 70th birthday is July 1, 2015, you will reach age 70½ on January 1, 2016. You will not have an RMD for 2015, but you must take your first RMD (for 2016) by April 1, 2017.
Terms of the plan govern
Of course, there are exceptions to the general rules. The plan’s terms may allow you to wait until the year you actually retire to take your first RMD (unless you are a 5% owner). Alternatively, a plan may require you to begin receiving distributions by April 1 of the year after you reach age 70½, even if you have not retired.
If you own 5% or more of the business sponsoring the plan, then you must begin receiving distributions by April 1 of the year after the calendar year in which you reach age 70½.
Date for receiving subsequent required minimum distributions
For each subsequent year after your required beginning date, you must withdraw your RMD by December 31.
The first year following the year you reach age 70½ you will generally have two required distribution dates: an April 1 withdrawal (for the year you turn 70½), and an additional withdrawal by December 31 (for the year following the year you turn 70½). To avoid having both of these amounts included in your income for the same year, you can make your first withdrawal by December 31 of the year you turn 70½ instead of waiting until April 1 of the following year.
Consequence for failing to take required minimum distributions
If you do not take any distributions, or if the distributions are not large enough, you may be subject to a 50% excise tax on the amount not distributed as required.
Required minimum distributions and estate planning
After your death, your remaining plan assets will be paid to your beneficiary over his or her lifetime (unless you or your plan provide for a shorter distribution period). If you die before naming a beneficiary, but after the date the IRS says you must begin distributions from your plan, your remaining plan assets will be paid out over a period equal to your life expectancy immediately before your death unless your plan calls for a shorter period. If you die before that date without having named a beneficiary, your plan assets must be paid out within five years of your death.
Therefore, at the same time you are arranging your post-retirement finances, you can also incorporate some estate planning. There is some flexibility and opportunity in the designation of your beneficiaries. If you would like to make sure your spouse's financial needs will be taken care of after your death, but you would also like to let your assets continue to accumulate on a tax-deferred basis and eventually provide an inheritance for your children or grandchildren, you should name your spouse the primary beneficiary and your younger heirs the secondary beneficiaries. If your spouse doesn't need your retirement plan assets for his or her support after your death, he or she has until the last day of the year that follows the year of your death to disclaim any interest in your account assets. This allows that amount to pass directly to your younger beneficiaries, over their longer life expectancy, as if your spouse had never been named a beneficiary at all.
Within the context of the IRS rules on retirement distributions, you have an opportunity to do some tax planning. If you want to know more about the rules and how they will work best in your situation, please don't hesitate to call our office.