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Understanding Required Minimum Distributions (RMDs)

If you have savings in retirement accounts, reaching age 70½ marks a new financial milestone. That's when IRS regulations require you to begin withdrawing a minimum amount of money from your tax-advantaged retirement accounts each year. These withdrawals are called Required Minimum Distributions or RMDs. 

By April 1 of the calendar year following the year you turn age 70½, you generally have to take RMDs from any retirement account in which you contributed tax-deferred monies or had tax-deferred earnings, including Traditional IRAs, 401(k)s, and 403(b)s. You are not required to take RMDs from Roth IRAs during your lifetime.

Calculating Your RMDs

Many rules and regulations dictate how you determine RMDs. It can be a complicated process, and you may want to consult a financial advisor or your tax advisor for help. Consider these guidelines: 

  • RMDs are determined by your age and account balance, and they’re based on your life expectancy. 
  • If you have a spousal beneficiary who is more than 10 years younger than you, and he or she is the sole beneficiary for the entire distribution year, you can base your RMD on your joint life expectancy. 
  • You generally have until April 1 of the year following the calendar year you turn 70½ to take your first RMD. This is known as your required beginning date or RBD. 
  • After making your first RMD, you may withdraw your annual RMD in one distribution or make withdrawals periodically throughout the year, but the total annual minimum amount must be withdrawn by December 31. 
  • 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. 
  • You may not use withdrawals from Roth IRAs to satisfy RMD requirements. 
  • If you have qualified plan accounts like 401(k)s or 403(b)s in addition to your IRAs, you must calculate and satisfy your RMDs for them separately from your IRAs. And, if you have more than one qualified retirement plan account, you must calculate and satisfy your RMD requirements separately for each qualified plan account. 

Paying Taxes on RMDs

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 the right amount each year. If you withdraw less than the minimum required amount, the IRS may assess a penalty equal to 50% of the amount of the RMD not taken. However, you can withdraw more than the required amount. 

Other Considerations

You can contribute to a Roth IRA after age 70½ as long as you have earned income and meet the income requirements. Otherwise, you generally cannot contribute to any other kind of IRA in the year you turn age 70½ or any year thereafter. 

As you begin withdrawing your RMDs, you will need to decide how you’ll use this money. You may want to use it to pay expenses or invest it in a non-retirement account such as a WellsTrade® brokerage account, CD, or annuity

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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