ABCs of RMDs
For the 2.1 million baby boomers who will turn 70 throughout 2016, the Internal Revenue Service (IRS) will require individuals to start pulling Required Minimum Distributions (RMD) from their retirement plans.
An RMD is the amount that the IRS requires individuals, at the age of 70 ½ years old, to begin pulling a certain amount of money from certain retirement accounts. This is to ensure the government receives tax revenue from tax-sheltered retirement accounts. Accounts subjected to RMDs are the follow:
- Traditional IRAs
- Rollover IRAs
- Inherited IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k), 403(b) and 457(b)s
- Keogh Plans
With a Roth IRA, there is no RMD unless you were an individual who inherited the account. Roth 401(k)s however do require a minimum RMD.
The amount of your RMD is determined by the amount of money stored in your retirement accounts and the IRS’s life expectancy estimates. There is an exception to the rule: if you’re married and your spouse is 10 years younger and your sole beneficiary, the RMD will be less than it would otherwise be.
There are taxes and possible penalties that exist with RMDs. RMDs are taxed as ordinary income at the federal income tax rate that you receive.
One way to avoid the large RMD taxes is by starting in your 60s, begin converting some of your traditional IRAs to Roth IRAs – they aren’t subjected to Required Minimum Distributions.
