Ready to Retire?

Calculating Your RMD

When it comes time to start withdrawing the money you’ve spent a lifetime accumulating in your retirement portfolio, you want to ensure that you make the right decisions.

One that the government makes for you is requiring that you withdraw at least some of your funds annually, depending on your age and the account type. This is known as a required minimum distribution, or RMD, and it must be taken from your retirement accounts (other than Roth IRAs) by Dec. 31 each year, starting the year after you turn age 70½.

Generally, an RMD is determined using uniform life expectancy tables that take into consideration the account owner’s and/or account beneficiary’s age and marital status, as well as their account balance(s) as of Dec. 31 of the year prior to the distribution year.

The exact distribution amount changes from year to year. It is calculated by dividing an account’s year-end value by the distribution period determined by the Internal Revenue Service (see table below). For instance, an account holder with a $100,000 traditional IRA at age 75 would need to withdraw $4,367 ($100,000/22.9), or 4.37% of the total balance.

HERE ARE SOME IMPORTANT CONSIDERATIONS FOR THOSE 
ENTERING THE DISTRIBUTION PHASE OF THEIR INVESTING LIVES.

You can pick the account(s) you withdraw from…

If you have more than one of the same type of retirement account—such as multiple traditional IRAs—you can either take individual RMDs from each account or aggregate your total account values and withdraw this amount from one account. As long as your total RMD value is withdrawn, you will have satisfied the IRS requirement.

… Unless they are two different types of accounts.

If you own more than one type of account, such as an IRA and an employer-sponsored plan account, you’ll need to calculate your RMD for both types of accounts separately and take the proper amount from each.

You may be able to defer if you’re still working

If you are still employed at age 70½, you may be able to defer taking RMDs from your employer-sponsored plan until after you retire. You’ll need to check with your employer to see if this applies to you.

The implications can be severe for failing to comply.

If you fail to take your full RMD, the IRS may assess an excise tax of up to 50% on the amount you should have withdrawn and you’ll have to take the distribution.

Taxes are still due upon withdrawal.

You will probably face a full or partial tax bite for your distributions, depending on whether your traditional IRA was funded with nondeductible contributions. Note also that the amount you are required to withdraw may bump you up into a higher tax bracket.

You can donate your RMDs to charity.

If you are an IRA owner you can contribute up to $100,000 of your IRA directly to qualified charities and have it count toward your RMD. If you’ve inherited an IRA, these donations are allowable as long as you are over age 70½.

Roth IRAs are exempt.

If you own a Roth IRA, you don’t need to take an RMD. However, note that any distributions taken from a Roth IRA do not count toward your RMD amount, and restrictions apply to the beneficiaries of inherited Roth IRAs. Also note that the RMD rules do apply to Roth 401(k)s.

Like many tax rules, those governing minimum distributions can be complex. Don’t wait until end of year to begin calculating your RMD and withdrawing funds.

John Harris’ office is located at 3700 W. Robinson St., Suite 220, Norman, OK 73072. He can be reached at 366.3426.

Sources/Disclaimer
irs.gov/pub/irs-pdf/p590b.pdf

1Your first RMD may be postponed until April 1 in the year after you turn age 70½.

If you’d like to learn more, Please contact John Harris.

The author(s) and/or publication are neither employees of nor affiliated with Morgan Stanley Smith Barney LLC (“Morgan Stanley”). By providing this third party publication, we are not implying an affiliation, sponsorship, endorsement, approval, investigation, verification or monitoring by Morgan Stanley of any information contained in the publication.

The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.

John Harris may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where he is registered or excluded or exempted from registration.

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley. Individuals are encouraged to consult their tax and legal advisors regarding any potential tax and related consequences of any investments made under an IRA.

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