Year-end Planning Tips 1/10 – RMD (Required Minimum Distribution)

At age 70 ½ the Internal Revenue Service requires that you begin taking Required Minimum distributions out of your Traditional Individual Retirement Account – IRA.  In most cases either the brokerage house or mutual fund company where your account is held will send you a reminder to you between three and two months prior to year-end.  Generally they will have calculated the amount you must take for the current year.  Failure to take said distribution comes with a penalty of 50% of the amount you should have taken. If your RMD was $4500 for the year and you did not take it then your penalty would be $2,250.   This amount will of course increase your federal taxable income and as such it would be advisable to with taxes withheld that the time of distribution.

Non-spousal inherited IRAs are they tricky ones.  I have yet to come across a financial institution holding the assets of a non-spousal IRA (IRA BDA) that will remind you or calculate the amount for that matter.  The IRS does require that you take withdrawals but the calculation is a little different from how you would calculate your own or a spousal IRA.  In the case of spousal inherited IRA you are permitted to treat that as your own and as such you would not the calculator below.

Beneficiary required minimum distribution Calculator 

It is important to note after attaining age 70 ½ you can no longer make contributions to your traditional IRA.  Roth IRAs, while similar in allowing withdrawals at age 59 ½ without penalty like the regular IRAs but that is where the similarities end.  Roth IRAs allow contributions after age 70 ½ and do not impose required minimum distributions either after attaining age 70 ½.

For employer sponsored plans the Third Party administrator will usually take the responsibility of keeping you in compliance and informing you according as and when distributions are required.  If you are still actively employed you are not required to take RMDs but there is an exception for the owner of the business who has attained 70 ½.  Even though they are required to take RMD on an annual basis they are also permitted to make contributions should they wish to.