Hyden, Miron & Foster, PLLC Law Blog

Wednesday, August 8, 2018

Understanding RMDs in IRAs

Retirement accounts are extremely popular vehicles for saving for retirement. However, the government does not allow you to leave your tax-deferred dollars in an Individual Retirement Account (IRA) indefinitely. While it is not a problem for some individuals, some retirees would prefer to leave the money in the account if they have sufficient income. Mandatory withdrawals from an IRA could result in an income tax debt. Our Arkansas retirement plan attorneys work with clients to develop a comprehensive retirement plan that provides sufficient income during your retirement years while minimizing the taxes you owe each year.

What are Individual Retirement Account RMDs?

When you turn 70 ½ years old, you must withdraw your first RMD (required minimum distribution) from your IRA, including Simple IRAs and SEPs. The first distribution must be withdrawn by April 1 of the calendar year after you turn 70 ½ years old. After that, you must withdraw your RMD by December 31 of each year. Roth IRAs do not have required withdrawals because the money deposited into a Roth IRA is after-tax dollars. Therefore, the IRS is not concerned about the money in that account as it was taxed before you deposited it into the Roth IRA.

It is important to remember that during the first year of mandatory distributions, you will have two withdrawals. You must make the first withdrawal by April 1 that year for the previous calendar year in which you turned 70 ½ years old. You can avoid having two withdrawals during the same year by opting to make the first RMD during the calendar year you turn 70 ½ years old instead of waiting until the next calendar year. This strategy can help you avoid or reduce your income tax debt.

The amount of your RMDs depends on several factors. The IRS has a worksheet and other documents online to assist individuals in calculating their RMDs. Because the forms can be confusing and you do not want to incur a penalty, you may want to consult an Arkansas retirement plan attorney about the amount of your RMDs.

Failure to Withdraw the Required Minimum Distributions from an Individual Retirement Account

If you fail to withdraw funds from your IRA after reaching age 70 ½ years or the funds withdrawn do not equal the minimum required distributions, you could face a substantial penalty. You may be required to pay a 50 percent excise tax on the funds that should have been distributed but were not withdrawn.

IRA Distributions After the Owner Dies

When a loved one passes away owning an IRA, you need to withdraw the RMD for that year that the account holder would have withdrawn himself or herself. Subsequent RMDs depend on several factors, including the identity of the designated beneficiary. The method for calculating RMDs for designated beneficiaries is different from the method used by the account holder.  It can be a bit overwhelming for someone who may not own an IRA and has never calculated an RMD.

If you have questions about your IRA, RMDs, or other retirement plans, contact an Arkansas retirement plan attorney at Hyden, Miron & Foster, PLLC. Our Arkansas retirement plan attorneys can answer questions and provide guidance if you need assistance.

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