If you are a owner of an employer sponsored retirement plan or traditional IRA, it’s very important to understand the implications of your required minimum distribution (RMD). These distributions are required to be taken each year once you have reached the age of 70 ½, and they must be taken by December 31st of each year to avoid stiff penalties.
While your IRA administrator may be responsible for calculating the proper amount and making sure it is distributed on time, the IRA stipulates that is ultimately the owner’s responsibility to make sure it’s all done correctly.
If you do not take the RMD on time – or you have a shortfall in distribution – the IRS will penalize you by taking 50% of the amount that you were supposed to receive. In these circumstances, you would have to fill out Form 5329: Additional Taxes on Qualified Plans, and file it with your tax return for the year.
The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
The amount of your required distribution is based on two things: your prior year’s December 31st account balance, and an IRS table based on your age and circumstance. The most common table – covering distributions for ages between 70 and 90 – is the Uniform Life Expectancy Table. Also, there are alternate tables if you have a spouse who is ten years younger than you, or if you are taking distributions as a non-spouse beneficiary of an IRA account.
To avoid penalties, it is highly recommended that you work with your tax accountant to calculate these RMD amounts and make sure they are correct each year.