Required Minimum Distribution - Part I

August 26, 2015

If you have an account in a qualified retirement plan, you need to understand that one day you will be forced to take withdrawals from your account whether you want to or not. For many this is not a significant concern as these accounts were designed to provide their income in retirement and they are or will withdraw more than enough from them to satisfy the rules. Either way, we will cover some of the basics about Required Minimum Distribution (RMD) along with some key considerations.

Required Minimum Distributions, as already stated, apply to employer sponsored retirement plans including 401(k), 403(b), 457(b), and profit-sharing plans. RMD also applies to traditional IRAs and IRA-based plans such as SEPs, SARSEPs and SIMPLE IRAs.

So what is RMD? As the name implies, it is a minimum amount that an account holder must withdraw on an annual basis. The first such withdrawal must be made in the year in which the account holder reached age 70 ½. For the very first withdrawal, the deadline for the withdrawal is actually April 1^st of the next year, but from that point forward, the withdrawals must be made by December 31^st each year.

The amount of the withdrawal will vary each year. To determine the minimum withdrawal, you start with the account balance as of the prior year-end. You then find a divisor by referring to the appropriate life expectancy chart from the IRS and using the factor based on your age at year-end.

Age	Distribution Period	Age	Distribution Period
70	27.4	93	9.6
71	26.5	94	9.1
72	25.6	95	8.6
73	24.7	96	8.1
74	23.8	97	7.6
75	22.9	98	7.1
76	22.0	99	6.7
77	21.2	100	6.3
78	20.3	101	5.9
79	19.5	102	5.5
80	18.7	103	5.2
81	17.9	104	4.9
82	17.1	105	4.5
83	16.3	106	4.2
84	15.5	107	3.9
85	14.8	108	3.7
86	14.1	109	3.4
87	13.4	110	3.1
88	12.7	111	2.9
89	12.0	112	2.6
90	11.4	113	2.4
91	10.8	114	2.1
92	10.2	115+	1.9

Source: www.irs.gov/publications/p590b/index.html#en_US_2014_publink1000231236

For example, let’s consider the fictitious case of James Buchanan. Let’s assume James has been taking RMDs and will now turn 74 in 2015. His IRA account balance as of December 31, 2014 is $100,000. Since he will be 74 at the end of 2015, his factor will be 23.8. If we divide $100,000 by 23.8, we get $4,201.68. Therefore, James will need to withdraw at least $4,201.68 from his IRA account by December 31, 2015.

That’s a quick review of the basics, but there is more to the issue. We won’t go into the complicated details here, but there are exceptions when RMD can be postponed past 70 ½. Also, the penalty for not taking an RMD is severe – a 50% tax on the required withdrawal.

In part two of this blog we’ll continue the discussion of RMD and in particular mistakes to avoid if you have multiple retirement plan accounts.

If we at Kemp Harvest Financial Group can help you in any way with regard to your Required Minimum Distributions or other financial planning needs, please feel free to contact us.

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