You’ve done it! You’ve made it to your golden years and saved a pile of gold to happily retire. Leave it to the government to hit you with a heavy tax if you don’t start using your retirement funds, whether you want to or not.
If you were born before July 1, 1945, and have money in an Individual Retirement Arrangement (IRA) or workplace retirement plan, you must make your Required Minimum Distribution (RMD) before December 31, 2015.
Owners of traditional IRAs, Simplified Employee Pension (SEP) IRAs, Savings Incentive Match Plans for Employees ( SIMPLE) IRAs, 401(k), 403(b), and 457(b) accounts must take an annual RMD for each qualifying account when they reach the age of 70 ½. Owners of Roth IRAs however, do not need to make minimum distributions during their lifetime.
If you were born before July 1, 1945, your required distribution generally must be made before the end of 2015. However, if you were born after June 30, 1944 and before July 1, 1945, then you can push back taking your distribution until April 1, 2016.
Unfortunately, if you fail to take the RMD, the Internal Revenue Service will tax you substantially. For account owners that fail to withdraw a RMD, the correct RMD, or withdraw the RMD by the deadline; the amount not withdrawn is taxed at an astounding 50%.
The amount of the RMD that needs to be made to avoid the punitive tax is determined by the account owner’s life expectancy as of December 31, 2015, and the balance in the account as of December 31, 2014.
There is little bit of wiggle room in regards to how the distribution is made. An IRA owner must calculate the RMD separately for each IRA that he or she owns. However, the total distribution can be taken from one or more of the IRAs. Similarly, a 403(b) account must calculate the RMD separately for each 403(b) owned. But the total amount may be distributed from one or more of the 403(b) accounts.
Conversely however, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts.
If you own a qualifying retirement account you likely rely heavily on your account custodian or administrator to ensure you’re not hit with this heavy tax. Unfortunately, the tax is levied on the owner of the account if the distribution is not timely made or accurately calculated. So be sure to take the initiative if you were born before July 1, 1945 to ensure you don’t pay money to the government that you likely will need during your retirement.
This article is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.