ABCs of RMDs
This is called a Required Minimum Distribution, and it only applies to retirement accounts. Those contributions that you make to your retirement accounts…you don’t pay tax on them. And the earnings…you don’t pay tax on them. But that’s not forever, because Uncle Sam wants to make sure that he gets his money.
If you have a 401(k), a 403(b), a Traditional IRA, a SIMPLE IRA, or a SEP IRA, then you’re going to have to do this calculation. But, this does not apply to Roth IRAs. So, if you’re already retired, you have to look at that. The number you have to take out, the dollar amount, changes every year.
First, know that you must start doing this when you reach the age of 70 ½. That very first year, you can delay until April 1st of the next year (delay taking out that money), but doing that could mean that you’re doubling up on the tax bill. After the first year, you have to take that money out by the end of the next year (12/31).
Most providers (banks, brokerage houses, mutual funds) will do the calculation for you, but this is how it works. You look at the value of your retirement account on the end of the year from the previous year (12/31), and then you look up your age in the life expectancy tables. IRS.gov has those tables. There are three different tables. Most will use the Uniform Table. That age that you are corresponds to a divisor, so you divide the previous year end value by the divisor, and that tells you how much you have to take out for the next year. That is your RMD, your Required Minimum Distribution.
The amount that you take out, that’s what you’re going to have to pay taxes on. So most people only take out what they have to take out (the RMD).
Now, you may have more than one retirement account. Uncle Sam doesn’t care where you take the money out. You can calculate this based on the total of all of the accounts (take out the total RMD from one account), or you can take it out of each of those accounts (take out an RMD for each account). It doesn’t matter. They just want to make sure that eventually we take the money out, and we pay our taxes.
Wherever you have your retirement account, that institution should help you. You can call and ask those questions.