7 Things You Need to Know About 2018 Required Minimum Distributions

7 Things You Need to Know About 2018 Required Minimum Distributions

1. Almost Every Retirement Account Is Subject To Required Minimum Distributions (RMDs)

RMDs apply to 401(k)s, 403(b)s, Profit Sharing plans, Money Purchase Pensions, IRAs, SIMPLE IRAs, and SEP IRAs, among others. Inherited IRAs are subject to RMDs, but are based on the life expectancy of the original owner, not the beneficiary. Roth IRAs do not require withdrawals during the life of the owner. Read more from the IRS here.

2. Withdrawals To Meet RMD Requirements Are Taxable

Withdrawals, since not previously taxed, will be included in your taxable ordinary income. RMDs are the minimum that you must withdraw each year — you can always withdraw more, but withdrawing more than the maximum does not allow you to carry over the difference and lowering your RMD in future years. Read more from Vanguard here.

3. Failure To Comply With RMD Rules Can Carry A Stiff Penalty

There is a 50% penalty on the amount you were supposed to withdraw and did not. The RMD is based on the total balance of all your IRAs as of December 31 of the previous year. If you fail to take it by December 31 of the current year (with some exception for your first RMD), you will need to take the RMD late, submit Form 5329 available here and ask the IRS for leniency in imposing the penalty. Read more from a post by Rodgers Associates here.

4. You Can Defer Up To 25% of Your RMDs to Age 85 With A Qualified Longevity Annuity Contract

Since 2014, it’s been possible to defer a portion (the lesser of 25% or $130,000) of your RMDs by purchasing a specific kind of annuity called a Qualified Longevity Annuity Contract, which allows you to defer income until as late as age 85. You can read more from Blueprint Income here.

5. RMDs Start At 70 ½ And Must Be Paid By The End Of The Year (Other Than The First One)

Your first RMD can be paid in the year you’re subject to it or the next year. All subsequent RMDs (those that occur after the year in which you turned age 70 ½) must be paid by December 31 of that year. The year after the year in which you turned 70 ½, you might be subject to two years worth of RMDs in the same year if you didn’t pay last year’s RMD last year. You can read more from Charles Schwab here.

6. The Size Of Your RMDs Changes Every Year

It’s a percentage of your December 31, 2017 IRA balance. What percentage you use is based on your current age (and potentially the age of your spouse). You can determine it by using worksheets directly on the IRS website here. Charles Schwab also has a relatively user friendly calculator here.

Other tables available here if you don’t fit within the parameters of the IRS’s Table 1 shown above. Read more about calculating size of your RMDs from Vanguard here.

7. RMD Rules Might Soon Change, But Probably Not For This Year

Last month, President Trump signed an executive order that, among other things, directed the Department of Treasury to review RMD rules with an eyes toward making the start age for RMDs later than 70 ½ and/or decreasing the amount of RMDs once they start. This is a change that makes sense given that the tables are nearly two decades old. These changes are unlikely to impact 2018 or even 2019 RMDs. You can read more about the possible changes coming in one of my prior posts about this topic here.

Author Bio

Matt Carey is a millennial with a passion for retirement. He believes in the power of technology to make retirement simpler. He was formerly a Policy Advisor at the US Department of Treasury, where he focused on how retirement is changing due to longer life spans and the decline of pensions.

Source: Forbes
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