Required minimal distributions (RMDs): Are you ready?

Those of you nearing age 70 have likely heard and read about RMDs (retirement minimum distributions). https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions. Let’s go over some basic rules here. Later this year I can go over some details and questions you may want to ask your financial advisor. (Disclosure: I am not an expert at this but since I am at this stage, I have investigated RMDs and this is my understanding of the rules).

1. First, you are required to take RMDs from your personal IRA or company sponsored 401k once you reach age 70 ½ unless you are working at your employer through which you have the qualified plan. So, what constitutes ‘working.’ The IRS rules are not clear. Most advisors advise that if you receive a 1099 you do not have to withdraw but what if you are paid $1 annually? However, if your plan is from a previous employer, you are required to withdraw. Check with your employer or your tax preparer/advisor.

2. You must begin distributions from your retirement account no later than April 1 of the year following the year you turn age 70 ½. Those who turn 70 ½ in 2019 can wait until April 1, 2020 to take your first distribution. A big caveat later.

3. Unless you have already been taxed on the withdrawal $, you will pay ordinary income taxes. You will pay a 10% penalty if you should withdraw prior to age 59 ½. You can withdraw after 59 ½ and 70 ½ with no penalty. But, after that age, you must follow the IRS table for mandated withdrawal. If you forget to take that first withdrawal you may pay a 50% excise tax! Do not think you can skate without the IRS knowing. Banks, brokerages and other financial companies or other custodians of your retirement accounts must report to the IRS annually the amount of the RMD for each taxpayer and for each year a distribution is required.