• Mark Fonville, CFP

Have You Taken Your RMD This Year?

Updated: Jan 14, 2019


The end of the year is upon us once again. I love this time of year: laughing with family, cooking favorite foods, embarking on new and old traditions. This time of year is special, and it is important to think about preparing yourself for the new year.


But before the glimmer of 2019 takes over, there are a few important housekeeping items to address. If you are currently retired, ensuring you have taken your RMD is one of them.


What is an RMD?


An RMD or Required Minimum Distribution is a fixed amount of money that must be withdrawn from your retirement savings accounts each year. Once you turn 70 ½, the IRS will require you to withdraw RMDs from your account. If you don’t, you are faced with a 50% penalty on the money that was supposed to be withdrawn.


It is also important to note that if you are a beneficiary who has inherited an IRA or 401(k), the IRS will hold you to the RMD rule as well.


RMD payments do not remain static year after year. The IRS uses a system to calculate your RMD: your iRA account balance on December 31st of the previous year divided by your distribution period (life expectancy).


Your life expectancy can be determined from the IRS Uniform Lifetime table.


Source: IRA Required Minimum Distributions

When Do You Need to Take Your RMD?


Now that you know how to calculate your RMD, you have to know when you are required to take it out. Your first RMD will depend on your birthday, which you can calculate using this tool. Your first RMD must be taken by April 1st following the year you turn 70 ½. Each subsequent RMD must be taken by December 31.


For example, let’s say your birthday is in October and you were born in 1960. Your first RMD would have to be taken by April 1 of 2023 and your second RMD must be taken by December 31 2023. The first year is a bit more complicated than the subsequent years to come since you may have to withdraw twice in one year.


If you do wait until April 1st to take your first RMD and withdraw another one in December, you could be facing a larger tax bill than you intended. Since the money in your retirement accounts has grown on a tax-deferred basis for many years, the withdrawals from your IRA (excluding Roth) and 401(k) will be taxed as income.


Because of this, you may consider taking your first RMD in the year prior to turning 70 ½ instead of waiting until April.


What Accounts Require an RMD?


Not every savings vehicle you have used over the years requires an RMD. Here is a list of the accounts that do require a required annual withdrawal.

  • Traditional IRA

  • SEP IRA

  • SIMPLE IRA

  • 401(k)

  • 403(b)

  • 457(b)

  • Roth 401(k)


An important note here is that a Roth 401(k) account is subject to RMD, but a Roth IRA is not. As a result, you may consider rolling over your Roth 401 (k) into a Roth IRA to avoid the RMD.


What If You Have Multiple Accounts?


Many people build up retirement savings in multiple accounts: Traditional IRA, SEP/Simple IRA, Roth IRA, 401(k), and other workplace accounts.


If you have multiple accounts, do you have to withdraw an RMD for each?


The short answer is no. For an example, let’s say you have two 401(k) accounts and two IRAs. An RMD must be taken from one of the 401(k) accounts and one of the IRAs. Luckily, you are not responsible for removing money from every individual account you hold, but you do have to withdraw from each type of retirement account you hold.


To put this in context, since each type of retirement account (401k, IRA, etc.) has grown tax-deferred, eventually you will have to pay the piper (i.e the IRS) and each account is responsible for paying its fair share of taxes. At the end of this year, take inventory of your retirement accounts and ensure that you have taken your RMD from each type needed before December 31.


Conclusion


Housekeeping isn’t always the most exciting task, but it is a necessary one. Forgetting to take your RMDs can be a costly and frustrating mistake. It is important that you evaluate your finances at the end of each year and that includes taking your RMDs. Now that you know what they are, when to take them, and the accounts they affect, you are in good shape for tax season just ahead.


If you have any questions or would like to talk through your individual case, give us a call!



Author: Mark Fonville, CFP®

Mark is a wealth manager and President of Covenant Wealth Advisors, an independent and fee-only wealth management firm with offices in Williamsburg, VA and Richmond, VA. He has been a CERTIFIED FINANCIAL PLANNER™ since 2005. Read Mark's bio

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Covenant Wealth Advisors is a fee only financial planner and registered investment adviser with offices in Richmond, Va and Williamsburg, Va. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. *AUM as of June 30, 2018