Important Tax Move: Required Minimum Distributions (RMDs)
If you turn 70.5 during 2016 it’s time to begin taking Required Minimum Distributions (RMDs) from your IRA or 401K pre-tax savings. Some people start taking these distributions much earlier, but if you have left your savings untouched to allow it to grow tax-free as long as possible, the time is approaching to begin making withdrawals. This is an important tax move because it protects you from the big penalty if you fail to make the required distribution.
Here is a look at some of the details from Time.com Money.
You must take your distributions by Dec. 31, although there is a grace period the first year—those turning 70½ in 2016 have until April 1, 2017 to take an RMD. But you must make your withdrawals every year after that by Dec. 31. That includes a second distribution next year if you wait until April 1 to take your initial distribution for 2016. Generally, all tax-deferred savings accounts, such as traditional IRAs and 401(k)s fall under this rule. The exception is a Roth IRA, which is funded with after-tax money, gains are untaxed if you meet certain conditions, and no withdrawals are required during the original owner’s lifetime.
How much will you be required to withdraw? The RMD calculation is based on your total tax-deferred savings balance at year end and the number of years you are expected to live. For most people, your projected life expectancy can be found on table III of IRS Publication 590-B, which includes a RMD worksheet. If you are 71, for example, you are expected to live 26.5 more years, so your RMD will be a little less than 4% of your tax-deferred portfolio. – Time Money
Check Out The Consequences Before You Delay Your First Withdrawal
The IRS gives you extra time to make your first withdrawal. Before you decide to leave that money growing tax-free for every extra day possible, take a look at what the tax consequences can be. Here is an explanation from Motley Fool to help you evaluate where you stand as you make your decision about when to take that first important RMD.
You have extra time for your first one, but…
As the IRS rule states, your first required minimum distribution must be taken by April 1 of the calendar year following the year in which you turn 70-1/2. In other words, if you are going to turn 70-1/2 anytime in 2017, your first RMD doesn’t need to be taken until April 1, 2018.
However, subsequent RMDs must be taken by Dec. 31 of each year. So, if you wait until the last minute to take your first RMD, you’ll have to take your first two RMDs during the same calendar year.
This can have massive tax consequences. For example, let’s say that you’re retired and filing a single tax return. If you have a $1 million IRA, your first RMD at age 70-1/2 would be $36,496 according to the Uniform Lifetime Table and your second would be $37,736. The combination of these would push you well into the 25% tax bracket, without including any other taxable income, while taking just the first before the end of the calendar year in which you turn 70-1/2 would translate to a marginal tax rate of just 15%.
Therefore, be sure you’re fully aware of and prepared for the tax consequences before taking your first two RMDs during the same calendar year. – The Motley Fool
Have you begun taking RMDs yet?