By Jon L. Ten Haagen, CFP
A reader of my column wrote in asking for a piece on RMD, so...
RMD = Required Minimum Distribution. What is it and why is it so important to pay attention to?
A required Minimum Distribution – RMD is the minimum amount of required distribution from an IRA, SEP or Simple IRA (Individual Retirement Account), 401k, 403b, 457 plan, and thrift savings plan starting in the year after you reach age 70.5.
You then must take a certain amount from your accounts each year going forward.
This is a very serious topic which you should pay special attention. If you get it wrong and take out an amount short of what is required there is a 50-percent - let me repeat – a 50-percent penalty.
The government, IRS specifically allows you to invest in the retirement of choice and gives you the ability to save this money and let it grow through earnings and interest until you reach age 70.5. Then the government wants to get their payment for giving you this benefit for all those years. Do the calculation of getting this tax break for 20, 30 or more years vs. paying tax on interest and gains each year? The difference is amazing and the reason you should pay attention from when you are young and can start saving in an individual IRA or in an employee sponsored plan.
When you take your first distribution you can take it at any time in the year you reach age 70.5. Your other choice is to take it up to April 1 of the year after you turn 70.5. First blush would make you think this second option is the best choice, but this will make you responsible for the tax on two distributions in the same year. This could force you into a higher tax bracket. Avoid this situation.
There is an exception to the RMD – A ROTH IRA is not required to take distributions because they have after tax contributions and therefore are not tax-deferred.
Many ask if they have to take distributions from each qualified plan separately. You can do this or you can combine all you IRA account balances and take one distribution from one of the account. You can do the same from multiple 403b accounts. But you have to calculate and distribute the 401k amount only from the 401k. Aggregation is possible, but it depends on the account type.
If you reach age 70.5 and you are still working you may be able to defer taking your RMD until you fully retire. Check with HR at your plan administrator for their specifics. It is best if continue getting tax deferral until you have to start taking distributions, deferred compounding is a wonderful thing. Like the eighth wonder of the world. If you ae a 5% owner of the company, you cannot defer distributions until retirement.
Calculation of the distribution amount. You need the account valuation as of the end of the year before. Your distribution period which you get from the IRA issued life expectancy tables. Your previous year end fair market value is divided by your distribution period to arrive at your RMD. The IRS provides thee life expectancy table. Single life expectancy (table 1 which is used by only beneficiaries), table 2 – used by joint and last survivor expectancy and three the uniform life table. Table two is used by a retirement account owner who had designated a spouse who is more than 10 years their junior as the sole beneficiary of that account. In all other cases, including those in which there is either no designated beneficiary or a non-person beneficiary such as a charity table three is used to determine the distribution period.
I would strongly urge you to sit with a knowledgeable tax advisor and or a Certified Financial Planner (CFP) to make sure you are doing this right from the start. We are here to help and guide you with your financial decisions. We look forward to hearing from you and thank you for continuing to read these educational articles.
Investing is subject to risks including loss of principal invested. Past Performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. Jon L. Ten Haagen, CFP® and Royal Alliance Associates, Inc., do not offer tax advice or tax services. Please consult your tax specialist for individual advice. We make no specific comments or recommendations on any tax related details.
Huntington’s Jon L. Ten Haagen, CFP is founder and CEO of Ten Haagen Financial Services, Inc. which is an independent full-service Investment and financial planning firm. In this bi-monthly column he will answer your questions on the markets and investing. Ten Haagen has 39 years of experience as an investment professional. You can learn more about Ten Haagen Financial Services at Tenhaagen.com
Ten Haagen is an investment advisor representative offering securities and advisory services through Royal Alliance Associates, Inc., member of FINRA/SIPC, and a registered investment advisor. Ten Haagen is a certified financial planner (CFP) since 1982. The Ten Haagen offices are located at 191 New York Ave., Huntington. Please feel comfortable to call and stop by for a cup of coffee and a chat. E-mail questions to firstname.lastname@example.org
Ten Haagen is very active in the community giving back. He is on the board of a number of nonprofits and is the liaison for the Greater Huntington Council of Yacht and Boating Clubs, Inc. The boating council represents approximately 4,500 boating families helping to keep our waters safe and upgrading the water quality.