What’s the IRA required beginning date for withdrawals?
The IRS gave you this great tax-deferred retirement savings account but they want their pound of flesh at some point. When exactly do they want it? There’s a lot of confusion out there regarding the IRA rules for required minimum distributions (RMD’s).
Every IRA owner has to take them, they’re required by law after all. The penalty for missing your IRA required minimum distribution is 50% of the amount which was supposed to be withdrawn. With a penalty like that, it’s important you understand the nuances of IRA RMD’s.
How does the IRA required beginning date for withdrawals work?
Your required beginning date (RBD) is April 1st of the year AFTER you turn 70 and 1/2. If you turn 70 and 1/2 this year you MUST have your required minimum distribution withdrawn from your IRA by April 1st of next year. Miss this deadline and there’s a 50% penalty!
Most IRA owners don’t miss their required minimum distributions. The 50% penalty of the amount you should have withdrawn is pretty steep after all. Most IRA owners don’t miss their RMD because they don’t wait until April 1 of the year after they turn 70 and 1/2 to make their first withdrawal. Most IRA owners make the withdrawal in the year they actually turn 70 and 1/2.
If you wait until 4/1 you’re actually increasing your distributions in that year
Your first required minimum distribution starts when you turn 70 1/2. The IRS with it’s infinite graciousness simply gives you a grace period on your first required distribution. That grace period is April 1 of the following year.
The key here is IRA distributions are taxable for the year IN WHICH received, not the year FOR WHICH received. If you make the actual distribution in the year you turn 70 1/2 it’s taxable in that year. That’s the year FOR WHICH and IN WHICH it was received.
If you push the required distribution until April 1st of the following year it’s taxable in the following year IN WHICH it was received. Even though it was a distribution FOR the prior year (the year when you turned 70 1/2).
Should you wait until 4/1 of the following year to take your RMD?
Why would you want to wait to take it until 4/1 of the year after you turn 70 and 1/2 to take your first required minimum distribution? There are a few reasons. Let’s say for example you had a lot of earned income in the year you turned 70 1/2. Any extra IRA distributions in that year may have pushed you into a higher tax bracket.
Another reason is if you push the required distribution off until 4/1 of the following year you’ll be required to make TWO distributions in that year. You’ll make one for the year you turned 70 1/2 and one for the year after. Having TWO required distributions may push you into a higher tax bracket as well.
Some IRA owners want to defer the amount of tax owed as long as humanly possible. That’s another reason to wait until 4/1 of the year after you turn 70 1/2 to make your first required distribution. Just remember by doing so you’ll have two required distributions which you must make in one taxable year.
Determining the amount you’re required to withdraw from your IRA?
The amount of the required distribution is always determined by dividing your IRA account balance on December 31st of the prior year by your life expectancy factor. If you make your 70 1/2 IRA distribution the year you turn 70 1/2, your 12/31 balance will be reduced by that amount. Having the 12/31 balance reduced effectively lowers the amount of your required distribution the following year. In addition you’ll only make one required distribution in each of those tax years.
Understand the rules before you make your distribution
There’s a lot to consider with your required beginning date and required minimum distributions. It’s important to make the best decision possible. Generally speaking it’s best to make your year 70 1/2 distribution in the actual year you turn 70 1/2.
Taking your required minimum distribution when you’re required to start distributing will lower your following year’s RMD, likely reduce your overall taxes in each year, and give you some extra cash to enjoy retirement!