Boomer IRA & 401(k) Required Minimum Distribution (RMD) FAQs

Avoid stiff RMD penalties: You may begin withdrawing funds from your IRA and 401(k) accounts at age 59 1/2, but when you turn 70 1/2, it's required. minimum distributions (RMD) and baby boomers
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Key Takeaways

  • When you reach your seventies, you may be required to take distributions from your IRAs and other retirement accounts

  • Withdrawal requirements will vary from person to person since they depend on several factors

  • Failure to take required distributions may result in a stiff penalty

After decades of socking away money in retirement funds, baby boomers may hit the required minimum distribution (RMD) age threshold. That age may differ depending on when you hit 70 1/2 due to the new SECURE Act, but if you haven’t hit 70 1/2 by December 31, 2019, it’ll come into effect at 72. The government requires that you start drawing down your retirement assets from your individual retirement account (IRA) or company retirement plan via RMD, or else face a stiff penalty—50% of the RMD. Read the details of the SECURE Act here.

Avoid These Common Mistakes

Taking an IRA minimum distribution isn’t a complicated transaction, but there are details that need to be managed in order to avoid big penalties. “As baby boomers reach their seventies, they should be aware that they will need to take RMDs from their retirement accounts,” said Dara Luber, senior manager, retirement at TD Ameritrade, Inc.

“While it can be somewhat complicated to figure out your IRA RMD, it’s important to get it right because not taking the correct amount, or not taking them at all, could mean big tax penalties. You also need to know that distributions count as income and will be taxed,” Luber explained. 

And make sure your retirement account beneficiary designations are up to date. “Not updating your beneficiaries, or having no beneficiaries, could mean your assets won’t be distributed according to your actual wishes,” Luber added. 

Six Things You Need to Know

  1. How much do you need to withdraw? RMDs will vary from person to person, account to account, and are based on your age and the value of your account on December 31 of the previous year. It’s a good idea to be aware of the IRA minimum distribution rules that apply to you. Worksheets and tables are available on the IRS website. “RMD amounts need to be calculated annually based on the value of your account balance at the end of the prior year, your current age, and your life expectancy. It’s important that you know the correct amount and plan for the distributions annually,” Luber said.
  2. Are there exceptions? Of course. A Roth IRA has no RMDs during the owner's lifetime. However, Roth IRAs are subject to RMDs after the owner dies, and the same 50% penalty will apply if the beneficiary of the Roth IRA does not take the RMDs.
  3. How will it affect your taxes? IRA RMDs usually count as ordinary income in the year you receive the distribution. It will be added in to all your other income for that year and be taxed according to your tax bracket. If you made nondeductible IRA contributions or after-tax contributions to your company retirement plan, the amount of your contribution will not be taxable, but the earnings are. For your IRA, review your IRS Form 8606 to calculate how much of your RMD would be taxable. For your company retirement plan, contact your plan administrator to determine what amount is nontaxable.  
  4. Will this impact my Social Security check? It definitely could and probably will. “By increasing your taxable income, the RMDs may put you into a higher tax bracket, which could impact other retirement benefits such as Social Security and Medicare,” Luber explained.
  5. What is the deadline to take the RMD? Your first IRA required minimum distribution is due by April 1 the year after you begin taking RMDs.  After that first year, the annual deadline is December 31. “You might want to consider taking your first distribution by December 31 to avoid having two taxable distributions in the same year,” Luber added.
  6. What is the penalty? It’s a big one, which is why it’s important to make sure you adhere to the guidelines. “If you neglect to take your full distribution, you may be subject to 50% of the amount that you didn’t take as well as any income taxes on the full amount of the distribution,” Luber said.

Consider a Roth Conversion

Unlike a traditional IRA, which is tax-deferred until withdrawn, a Roth IRA is taxed up front but is tax-free when you take it as a distribution. And, again, with a Roth there is no RMD during the owner’s lifetime. However, Roth 401(k) plans have RMD requirements. Contact your plan administrator on the company 401(k) plan to learn how it processes 401(k) RMDs. But a word of caution: if you’re taking an IRA RMD and considering converting your traditional IRA to a Roth IRA this year, you must first satisfy this year’s RMD. In other words, you’re not allowed to convert RMD money. 

“If you have any questions about your RMD, talk to your financial professional to ensure that you understand all the withdrawal rules,” Luber concluded. 

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

Don’t Need Your RMD to Cover Current Expenses? Here Are Four Ideas:

  1. Reinvest into a taxable account. But remember: You'll need to cover the tax bill and perhaps pay a transfer fee. 
  2. Help the grandkids cover education expenses Grandparents can fund a 529 plan—up to $15,000 per year per child—without incurring federal gift taxes.*
  3. Increase your charitable giving According to the IRS, if you’re older than 70 1/2, the IRA Charitable Rollover can allow you to donate up to $100,000 to charitable organizations directly from your IRA without having it count as taxable income.
  4. Fund a Roth IRA If you have other earned income, you could use it to fund the Roth, then use the RMD for living expenses.

*An investor should consider a 529 Plan’s investment objectives, risks, charges and expenses before investing.  The Program Disclosure Statement available from the issuer, contains more information and should be read carefully before investing.

Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program and should consult their tax advisor, attorney and/or other advisor regarding their specific legal, investment or tax situation.  

Participation in a 529 College Savings Plan does not guarantee that contributions and the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses.

What Is a Required Minimum Distribution (RMD)?

Key Takeaways

  • When you reach your seventies, you may be required to take distributions from your IRAs and other retirement accounts

  • Withdrawal requirements will vary from person to person since they depend on several factors

  • Failure to take required distributions may result in a stiff penalty

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