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Understanding required minimum distributions (RMDs)

The Internal Revenue Code (IRC) requires IRA owners and participants in 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 (Simplified Employee Pension), and SIMPLE (Savings Incentive Match Plan for Employees) IRAs that you have, as well as from any QRPs left at former employers. The RBD is generally April 1 following the year you turn 73.

Key RMD rules to know

RMD rules can be complex and the excise tax 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 than you (meaning 11 years or more, not 10 1/2 for example), the IRS Joint Life Table can be used to determine the divisor. This results in a larger life expectancy divisor and smaller RMDs.
  • You have the option to delay your first RMD until April 1 following the year you obtain age 73 but can take it sooner. If the first year’s distribution is delayed until the following year, two distributions will be taxable in the same year; the first RMD and the second RMD, which must be taken by December 31. 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 25% excise tax for every dollar under-distributed. This may be reduced to 10%, if you correct the shortfall during a two-year correction window.
  • 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 distribute 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 and Roth IRA owners have no RMD due.
  • 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 to keep in mind

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

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 25% excise tax for every dollar under-distributed. This may be reduced to 10%, if you correct the shortfall during a two-year correction window. You can take more than your RMD, however excess amounts taken will not offset the RMD amounts in future years.

Other Considerations

You or your spouse, if filing jointly, must have earned income to make an IRA contribution. Traditional and Roth IRA contributions can be made at any age if eligibility requirements are met. If you are still working, employer contributions can be made to a SEP and salary deferral contributions to your SIMPLE IRA.

You can convert to a Roth IRA at any age. However, once you are 73 or older, it will be necessary to take your RMD prior to the conversion. You are not able to convert your RMD.

As you begin taking 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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