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| RMDs: Giving the IRS its Due |
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Uncle Sam has been kind enough to let you build your traditional IRA or 401(k) on a
tax-deferred basis. But his generosity won't last forever—eventually you'll need to
give him his due. That due will be in the form of a Required Minimum Distribution (RMD).
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A RMD is the minimum amount you must withdraw each year from your tax-deferred retirement accounts
(which include traditional, SEP, and Simple IRAs, as well as 401(k), 403(b), and 457 plans).
This requirement kicks in when you turn 70 ½ in order to give the IRS an opportunity to start
collecting income taxes on your pre-tax retirement savings. If you are still working, the IRS
won't force you to take a distribution from your current employer's plan. That waiver, however,
doesn't apply to IRAs, or to those who have at least a 5% ownership in the business sponsoring
the retirement plan.
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The amount you'll have to withdraw is calculated by dividing your account balance by an IRS estimate of your life expectancy. If your spouse is 10 years younger than you and is the sole beneficiary of your account, then you'll need to use a different IRS life expectancy table. To help you determine how much you need to withdraw, the IRS includes the life expectancy tables ( as well as access to downloadable worksheets) on its website. There are also a number of free, third-party online calculators that you might find easier to use than these worksheets.
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Whatever the amount, you'll need to make the withdrawal by Dec. 31 of each year after you turn 70 ½. If you fail to make the withdrawal or fail to withdraw the full amount, the IRS can impose a severe penalty, equal to 50% of the amount not distributed.
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Here are a few other things to consider:
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Delaying your first RMD
When you turn 70 ½ you have the option of postponing your first withdrawal until April 1 of the following year. In that following year, however, you'll end up having to make two RMDs (one in April for the skipped year and one for the current year). This could put in you in a much higher tax bracket or impact other aspects of your tax return.
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Taking your RMD from one account
When you turn 70 ½ you have the option of postponing your first withdrawal until April 1 of the following year. In that following year, however, you'll end up having to make two RMDs (one in April for the skipped year and one for the current year). This could put in you in a much higher tax bracket or impact other aspects of your tax return.
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Making RMD withdrawals all at once
Some experts believe you should wait until the last minute (Dec. 31) to make your RMD in order to let your money continue to work for you. Others will recommend that you spread out the withdrawals through the calendar of year in order to time your trades.
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Consider any balances in a ROTH IRA
Since you've already paid taxes on the money you put into your Roth IRA, RMDs aren't required and the balances within these accounts don't impact your RMDs.
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To get help with any specific questions, you may want to first go to the IRS' website. It contains a fairly in-depth FAQ that should answer some of your specific questions on RMD taxation, penalties, and waivers. You may also want to consult with a tax or financial advisor before making a withdrawal.
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