If you are over 70 years old and have a traditional, SEP or SIMPLE IRA or a 401(k), 403(b) or 457 retirement plan, April 1st means more to you than watching out for practical jokers – or people watching out for you, if you are the practical joker. It is the deadline for taking your first required minimum distribution (RMD).
You must begin taking minimum distributions out of your IRA by April 1st of the following year after you reach 70-1/2. Whether you turned 70-1/2 on January 1st or December 31st of 2013, you still need to take your first RMD by April 1st, 2014.
This applies to all of the retirement plans listed above, but not to Roth IRA's – since you have already paid taxes on those funds. You cannot convert a traditional IRA to a Roth IRA just to avoid minimum distribution, but you can after the RMD for the year has been taken. You are going to pay taxes on it one way or the other.
April 1st is only significant for the transitional year of distributions. For all RMD's afterward, the due date is December 31st of that year. If you took your first RMD by April 1st, 2014 as required, your second one will still need to be taken by December 31st, 2014. To avoid the tax issues from having both distributions included in the same tax year's income, it is better to take the distribution in the previous year. That also removes concerns about missing the deadline.
Failure to take out your RMD for any given year results in an excise tax of 50% on any amount that should have been removed as part of the RMD but was not distributed to you.
401(k)'s and similar employer-based plans may have different requirements based on when you retire. They may require you to begin receiving distributions earlier if you have retired, or may make you take distributions starting at age 70-1/2 even if you have not retired yet. Check with your plan administrator for the details that apply to you. If you are at least a 5% owner of the business that is sponsoring the plan, it is clear-cut – you must take minimum distributions at 70-1/2 per the usual rule.
Traditional minimum withdrawals are set up from a table determined by your life expectancy. The Uniform Lifetime Table is the most common chart to use; however, the Joint Life and Last Survivor Expectancy Table is used in cases where your spouse is the sole beneficiary and is at least 10 years and one day younger than you are.
The Uniform Lifetime table takes a progressively smaller slice of your IRA balance each year; it contains numbers to divide into your IRA balance to figure your distribution. For example, if you have a $100,000 balance in your IRA at age 70, you divide by the first number on the table (27.4) to get $3659.64 for your minimum distribution.
The Joint Life and Last Survivor Expectancy Table works in the same way, except your age and your spouse's age both determine the value. See IRS Publication 590, "Individual Retirement Arrangements," for tables and details.
With more than one IRA, you do not have to take each minimum distribution out of each IRA, but you do have to take out the correct total amount. You can take more from one and less from another.
In any case, do not let the deadline for your first minimum distribution sneak up on you. Saying "April Fools" to the IRS will not help.
Let the free MoneyTips Retirement Planner help
you calculate when you can retire without jeopardizing your lifestyle.