Retirement Plan Distributions May be Required by December 31

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As the end of year approaches, retirees should keep in mind the Required Minimum Distribution (RMD) rules for withdrawals from qualified retirement plans and IRAs. These rules were established to prevent account owners from accumulating funds in tax deferred retirement accounts indefinitely. In addition to the law's restrictions on when owners can start taking money from retirement accounts, these rules address distributions they must take. Most owners with other assets for their support withdraw only the RMD each year so plan assets may continue to accumulate tax deferred, but a 50% excise tax is imposed on required RMDs that are not distributed. Owners may always withdraw more than the RMD.


After an account owner reaches age 70½, he or she must make withdrawals each year. In 2018, owners born before July 1, 1948 must take RMDs. This applies to both IRAs (including SEPs and SIMPLE IRAs) and qualified plans such 401(k), 403(b), profit-sharing, and other defined contribution plans. However, employees with qualified plans who are still working do not have to take RMDs unless they are 5% company owners.


RMDs are not required from Roth IRA accounts. Since Roth distributions after retirement age are not taxable, the law does not mandate their distributions. Owners may take withdrawals, or not, as they see fit. However, beneficiaries of inherited Roth IRAs are subject to the RMD rules (although no tax is due on the distributions).


RMDs must be made by December 31 each year. But a special first-year rule allows those who turned age 70½ in 2018 (i.e., born from July 1, 1947 to June 30, 1948) to wait until April 1, 2019, to take their first RMD. Distributions before that April date count toward 2018 RMDs but are taxable in 2019. Keep in mind, if this special rule is selected for 2018, there will no distribution in 2018 but two taxable RMD distributions in 2019 - one by April 1 for 2018 and the other by December 31 for 2019. For all subsequent years, the RMD must be made by December 31.


How much RMD to withdraw from a retirement account depends upon the owner's life expectancy as listed in a special IRS table (or in some cases the joint life expectancy of the owner and spouse). To calculate 2018 RMDs, owners must divide their account balances on December 31, 2017 by the IRS table amount for their life expectancy at December 31, 2018. For example, if someone with IRA valued at $100,000 at December 31, 2017 turned 75 in 2018, the table shows a life expectancy of 13.4 years. The 2018 RMD would be $7,463 ($100,000/13.4).


Taxpayers with multiple IRAs calculate the RMD for each account separately, but may withdraw the aggregated total from any one (or any combination of) IRAs. It is not necessary to take a separate RMD from each IRA. For qualified plans, the RMD is calculated separately for each plan and must be withdrawn from that particular plan. Administrators of qualified plans usually calculate the RMD for plan owners.


Contact your LM Cohen professional if you have questions about taking required minimum distributions. All our prior tax alerts are available on the Updates page of our website.

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