Required Minimum Distributions
Required Minimum Distributions (RMDs) are the minimum yearly withdrawals that must be taken from certain retirement accounts starting in the year you turn 70 ½. These accounts include:
- Traditional and Simple IRAs
- Rollover IRAs
- 401(k) and 403(b) accounts
- Keogh accounts
The RMD for each year is going to be a substantially equal distribution over the life of the owner of the account. The RMD is calculated by dividing the retirement account balance at the end of the previous year by the applicable distribution period or life expectancy of the investor. While there is a minimum distribution that must be taken to avoid the 50% penalty, there is no maximum withdrawal amount.
In general, you have until April 1 of the year following the calendar year in which you reach age 70 ½ to take your first RMD. After that, the deadline for taking RMDs is December 31.
Because Roth IRA contributions are made with money on which taxes have been paid, there is no requirement to take RMDs on these accounts during the lifetime of the original investor. However, after the death of the original owner, the beneficiaries of Roth IRAs are subject to Minimum Distribution rules, just as they are with the other retirement accounts. Beneficiaries of these kinds of IRAs also face the 50% penalty if the RMD is not made on time.
Just as there are penalties for failing to take RMDs, there are penalties for taking early withdrawals from your IRA. If you take a withdrawal from an IRA prior to age 59 ½, an additional 10% penalty is assessed. Simple IRAs have a 25% penalty for early withdrawal if it is made within the first two years of participation in the Simple IRA.
There are exceptions to penalties for early withdrawals:
- Unreimbursed Medical Bills—you may withdraw money from a qualified retirement plan to pay for unreimbursed deductible medical expenses that exceed 10% of your Adjusted Gross Income.
- Disability—to qualify, you must be totally and permanently disabled. This is best proved if you are collecting disability payments from your insurance company or from Social Security.
- Health Insurance Premiums—you must be unemployed for 12 weeks in order to avoid the 10% penalty.
- Death of the Investor—beneficiaries can withdraw from the account unless the beneficiary is the spouse. The IRS still imposes the 10% penalty on spouses who inherit the IRA and elect to treat it as their own.
- Unpaid Taxes—if the IRS places a levy against the account for unpaid taxes, a penalty-free withdrawal is allowed.
- Home Buyers—first-time home buyers can take an early withdrawal free of penalties. If you are a previous home buyer, you may also take an early withdrawal penalty-free if you have not owned a home in the previous two years. The lifetime limit for penalty-free withdrawals to buy a home is $10,000.
- Higher Education Expenses—early withdrawals may be made to cover tuition and fees for enrollment at an eligible postsecondary educational institution for yourself, your spouse, immediate family members or grandchildren.
If you have additional questions about withdrawals from IRAs or any other financial concern, please contact us. We are more than happy to sit down with you to review your situation to ensure you’re making the best decision with your finances.