Most save for retirement in tax-deferred retirement accounts; meaning we delay paying taxes on those dollars until we take distributions in retirement. These dollars accumulate and grow, but they can’t stay tax-deferred forever. At a certain point, you must start making withdrawals. This is called the required minimum distribution (RMD).
Roughly 2.1 million Baby Boomers reached the age of 70 in 2016 and are started to take required distributions from tax-deferred retirement accounts. The RMD is a portion of a pre-tax account that must be distributed to the account holder starting the year he/she has reached age 70½, and is no longer employed by the Plan’s sponsor.
When Does the RMD Start?
You must take your first RMD the year in which you turn age 70½. However, the first payment can be delayed until April 1st of the following year. Delaying until April 1st of the following year will result in two RMDs in the same calendar year and potentially increase your tax liability. For all subsequent years you must take the RMD by December 31st.
For state employees participating in SoonerSave, the RMD for SoonerSave may be delayed until the member retires or terminates from a SoonerSave-participating employer, whichever occurs last. If you are working at a SoonerSave-participating employer past age 70½, RMDs will begin the year you retire.
How is the RMD Calculated?
The RMD calculation can be broken down into three steps.
- Find the balance of your pre-tax account as of December 31st of the previous year.
- Determine the distribution factor listed on the IRS website which corresponds to your age on your birthday of the current year.
- The final step is to divide the account balance by the distribution factor to find the RMD.
For example, a member had a balance of $100,000 in their taxdeferred retirement savings on December 31, 2018. This member will turn 75 later this year in 2019. The distribution period for age 75 is 22.9. As you can see in the example below, the RMD for 2019 is $4,366.81, which will need to be withdrawn from this retirement account before December 31, 2019 to avoid a penalty.
EXAMPLE
| 1 | Plan balance as of December 31, 2018 (previous year). | $100,000.00 |
| 2 | Distribution period for your age on your birthday this year in 2019. | 22.9 |
| 3 | Line 1 divided by number entered on line 2. This is your RMD for 2019. | $4,366.81 |
Pay Attention to Avoid a Tax Penalty
There is a hefty penalty for not meeting the RMD by the deadline. The penalty is 50% of the amount not distributed! In the example above, the RMD is $4,366.81. If the member, for whatever reason, did not take the distribution, a penalty of over $2,100 would be assessed. Avoid this penalty by meeting the required distribution deadline.
What’s Next?
If you have more than one pre-tax retirement saving account, you must calculate the RMD for each account individually. All plan administrators, including SoonerSave, will send reminders and communication about the RMD, but it is the member’s responsibility to take the distribution. Most plans, SoonerSave included, offer automated minimum distributions to help avoid the RMD penalty.
Saving for retirement involves long-term planning, discipline and dedication. Take some time to review your retirement plan and safeguard your nest egg by staying informed of the rules regarding required minimum distributions. For more information, visit www.irs.gov.
This article was first published in the Winter 2017 edition of the Retiring Right newsletter. Click here to view other newsletters. Not receiving your newsletter, update your address by completing the Change of Address form.