If you have savings in a tax-deferred retirement account such as a traditional IRA or 401(k), you are required to start taking Required Minimum Distributions (“RMD”) from these accounts after you turn 70 ½ years old. The exact amount of your annual RMD is calculated annually based on your age and the balance(s) of your account(s) at the end of the previous calendar year. The Internal Revenue Service provides two life expectancy tables for use in calculating your annual RMD — one for most retirees known as the "Uniform Lifetime Table" and another if the account's sole beneficiary is a spouse more than 10 years younger than the account owner.
Your first RMD must be taken by April 1 of the calendar year following the year in which you turn 70 ½. For example, if you turned 70 ½ at any time in 2016, your first RMD must be taken by April 1, 2017. Subsequent RMDs, however, must be taken by December 31 of each year. With 2016 coming to an end, eligible retirees should not forget to take their 2016 RMD by the end of the year. Failing to take your RMD by the applicable due date can result in severe IRS penalties, such as a 50% excise tax on the undistributed amount of your RMD for that year. For example, if you are required to take $50,000 from your IRA as your 2016 RMD but only take $20,000, you can be penalized on 50% of the difference ($30,000).
Eligible retirees should therefore know if and when they must receive an RMD, the date by which they must receive this distribution and exactly how much they need to take each year to avoid IRS penalties.
Contact Butterfield Schechter LLP if you have any questions about your RMD. Our experienced attorneys are more than happy to provide you with more details regarding your RMD, including the specific rules governing such distributions, common compliance issues and consequences, and various distribution options available to you and/or your beneficiaries.