Making Cents: Required distributions from a retirement plan

US Wealth Napolitano |

By: John P. Napolitano, CFP®, CPA, PFS, MST

Most people know that upon reaching age 70 ½, that you must soon begin taking withdrawals from most of your retirement plan accounts. The exceptions to the 70 ½ rule will be Roth IRAs and 401K plans if you are still working for the plan sponsor and their plan document allows a postponement of distributions until after retirement. For owners of 5% of more of the company, this exception does not apply. Please note that contributions to a Roth 401K plan may still require Required Minimum Distributions (RMDs) at 70 ½ unless you meet the still employed exception noted above.

Everyone has their own beliefs regarding when during the year is the best time to take your RMD.  I advocate for that RMD to happen early in the year.  The amount that you must withdraw is a calculation based on the fair market value of your retirement account as of the last day of the prior year divided by your life expectance according to the government tables.

There are a couple of good reasons to take that RMD early. The first one is really kind of simple – but effective.  If you take the RMD early in the year you can’t possibly forget to take it.  The stiff penalty for forgetting to take the RMD is 50% of the amount that you were supposed to withdraw. If you haven’t yet taken your 2018 RMD, there is no time like the present.

The second reason may be due to complications from death.  I know that most readers do not contemplate their own passing this year, but realize that if you do pass away and the RMD is missed by the appointed person or the retirement account beneficiaries, the 50% penalty will apply.

The first RMD is also a little tricky.  Your first distribution must be made by April 1 of the year following the year that you turn 70 ½. It almost feels as if the law makers were trying to trip you up on this one.  So if your birthday is July 1, 2017.  The six month date is 1/1/18.  Then your first RMD isn’t due to be withdrawn until April 1, 2019.  To add to the trickery, in 2019 you’ll have to take two distributions.  One for 2018 and one for 2019.  This is another great reason to work with an experienced planner during this time.  Waiting to do two RMDs in one year may cause bracket creep, and leave you in a higher tax bracket that you would have been had you taken your first RMD in the prior year even though you didn’t have to. 

Those who retire before age 70 may have a tax planning opportunity.  That opportunity could be to start small retirement withdrawals or Roth conversions right after retirement if you are in a low tax bracket. Utilizing these low bracket years right after retirement can significantly reduce your future RMDs.  The higher your net worth and retirement income, the better this tactic may work over your lifetime.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor

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