RMD Basics for First Year Distribution

by Craig Moser on January 12, 2018

For those boomers born between July 1, 1946 and June 30, 1947, you turned 70 ½ in 2017.   That means you need to take your first required minimum distribution (RMD) from your IRA and other “Pre-Tax” accounts.  Here are the RMD basics for the first year’s distribution.

Your First Year Distribution

Generally, you need to take your RMD’s by December 31st of the year for which it is due.  But, for your first RMD, you can defer the distribution to April 1st of the following year.  What that means is you can delay your first RMD until April 1st of the following year.  But should you?  Let’s say you take your first RMD on March 15, 2018.  You must also take your 2018 RMD by the end of 2018.  In this scenario, you take two RMDs in the same year.  Both distributions are taxable income for the same year.  For most taxpayers, that is not a good thing.

What age do you use?

Always use the age you are on the last day of the year.  For those of you born in 1946, you will use age 71 because that is how old you were on December 31, 2017.  For those of you born in 1947, you will use age 70 for the same reason.

Look up your age on the Uniform Lifetime Table to find your factor for the year.  If your spouse is more than 10 years younger than you, look up your joint ages on the Joint Life Expectancy Table to find your factor.  If your factor benefits you, use that factor versus a single life calculation.  Life expectancy tables can be in IRS Publication 590-B.

How to calculate your RMD.

The last piece of information you need is your prior year-end account balance.  Divide the factor from the previous step into the account balance from this step.  Now you have the amount of your RMD.  Simply repeat this process for each subsequent year.  The IRS has published the tables on their website.

Take your RMD.

The last step is to actually take your RMD.  If you missed the December 31st deadline and take your RMD in 2018, it’s taxable for 2018.  However, because this is your first RMD, your deadline is April 1, 2018.  There isn’t a penalty in this situation.

The penalty for missing an RMD.

The penalty for a missed RMD is 50% of the amount not taken.  Let’s say you miss taking $10,000 of your RMD.  The penalty is $5,000 (50% of $10,000).  In addition, you have to withdraw $10,000 and also pay income tax on itThat is a pretty strong incentive to make sure you take your RMD’s in full, and on time.

There is some good news here.  The IRS can waive the penalty for good cause.  The penalty is reported on Form 5329 which has a signature line and is considered a stand-alone return.  You must file this form, making sure you have a zero at the end for the tax amount due, and use the code RC on the line where you would show the amount of the penalty.  Then you include a brief explanation of why you missed the RMD.  The IRS will usually waive the penalty.  Because this is a stand-alone return, it is not a good idea to not file the form.  When it is not filed then the statute of limitations never starts to run and interest and penalties continue to accumulate.  So don’t make a bad thing worse by not filing it.

As with all financial planning engagements you should test to make sure you are on track to get all of your RMD’s and that you understand how each account is dealt with concerning RMD withdrawals.

Welcome to the world of RMDs!

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