The purpose of retirement savings is to produce an income during later years, not to transfer wealth to heirs. With this goal in mind, retirement savings vehicles come with Required Minimum Distributions (RMD). This forces the conversion of at least some retirement savings wealth into taxable income. The penalty for failing to take RMDs is severe – 50% on the amount not properly taken.
RMDs must start by April 1st following the year you turn seventy and a half for non-Roth retirement savings vehicle, including IRAs, SEP IRAs, and 401ks. The RMD must be received by December 31st of each year it is required.
The formula is a straightforward division and has the goal of turning the money into taxable income during the lifetime of the owner. The numerator is the account balance on the last day of the previous calendar year. The denominator is the expected life span of the owner.
The IRS has calculated average life spans and assembled The Uniform Lifetime Table, which is periodically updated. If the owner has a spouse that is younger by ten years or more, a separate table is used.
While this summary provides the basic overview of the RMD mechanism, there are some detailed rules for both routine situations and special situation. For example, a separate rule applies to individuals who own at least five percent of a business sponsoring the retirement vehicle.
Rules concerning spousal and non-spousal beneficiaries must also be understood within the total family wealth context. If you are considering developing an estate or wealth plan, RMD management must be a basic element. Please contact us.