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Understanding Required Minimum Distributions (RMDs)

IRS regulations require that owners of retirement accounts including IRAs and qualified employer sponsored retirement plans (QRPs) such as 401(k)s, 403 (b)s and governmental 457(b)s must begin taking distributions annually from these accounts. These distributions are referred to as required minimum distributions or RMDs.

Once you reach your required beginning date (RBD), you will begin taking RMDs from any Traditional, SEP, and SIMPLE IRAs that you have, as well as from any QRPs left at former employers. The RBD is generally April 1 of the year following the year you turn 70½.

Key RMD rules to know

RMD rules can be complex and penalties for not complying with the rules can be significant. You may want to consult a financial advisor or your tax advisor for help. Consider these guidelines:

  • Your RMD is calculated by dividing your account balance at the end of the previous year by the appropriate life expectancy divisor, based on your age as of 12/31, from IRS Life Expectancy Tables. Most IRA owners and plan participants will use the IRS Uniform Table to determine their divisor for the year.
  • When your spouse is the sole primary beneficiary and is more than 10 whole years younger (meaning 11 years or more, not 10 1/2 for example) than you the IRS Joint Life Table can be used to determine the divisor.
  • You have the option to delay your first RMD until April 1 of the year following the year you obtain age 70 1/2 but can take it sooner. Subsequent RMDs must be taken by December 31 of each year. You will owe ordinary income tax on the taxable portion of the distribution.
  • If you do not satisfy all of your RMD, you may be subject to a 50% IRS tax penalty on the difference between the RMD and the amount that you actually took.
  • If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all of your IRAs and withdraw the total from one IRA or a portion from each of your IRAs.
  • RMDs for Inherited IRAs must be satisfied separately from your other IRAs.
  • Distributions from Roth IRAs do not satisfy RMD requirements.
  • You cannot aggregate RMDs from all of your QRPs. You have to take RMDs from each QRP you have. You cannot satisfy your IRA RMD from your QRP or vice versa.

Taxes and penalties to keep in mind

RMDs are taxed as ordinary income for the tax year in which they are taken. If you made non-deductible contributions to your IRA, you must calculate your RMD based on the total balance, but your taxable income may be reduced proportionately for the after-tax contributions.

It's important to withdraw at least the RMD each year. If you do not satisfy all of your RMD, you may be subject to a 50% IRS tax penalty on the difference between the RMD and the amount that you actually took. You can take more than your RMD, however excess amounts taken will not offset the RMD amounts in future years.

Other Considerations

Traditional IRA contributions cannot be made for the year you turn age 70½ or subsequent years. If you are still working, contributions can be made to a SEP or SIMPLE IRA. Roth contributions are allowed after the age of 70½ if you, or your spouse if filing jointly, have earned income. Modified Adjusted Gross Income (MAGI) limits apply.

You can convert to a Roth IRA once you are 70½ or older, but it will be necessary to take your RMD prior to the conversion. You are not able to convert your RMD.

As you begin withdrawing your RMDs, you will need to decide how you’ll use this money. You are not required to distribute cash from the IRA to satisfy your RMD. Cash and/or securities can be distributed. Remember that these assets can be transferred to your non-retirement account such as a WellsTrade® brokerage account, CD, or annuity, or you may wish to use it pay for expenses.

The Financial Industry Regulatory Authority (FINRA) offers an RMD calculator you may wish to use.

We are here to provide guidance in calculating your RMD. To get started, contact a Wells Fargo Retirement Professional today.

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