Don’t Forget to Take your RMDs

It’s that time of year again. Required Minimum Distribution season is upon us. Here’s a quick reminder of the rules for everyone.

If you are age 70 1/2 and older, you must take a required minimum distribution (RMD) from your traditional 401(k)s and traditional IRAs by Dec. 31, 2016, and income tax is due on each withdrawal. The penalty for missing a required minimum distribution is 50 percent of the amount that should have been withdrawn, and that's in addition to the income tax due.

However, if you turned 70 1/2 in 2016, you can delay this first required minimum distribution until April 1, 2017, but all subsequent distributions will be due by the end of the calendar year. Delaying your first distribution until April necessitates taking two required distributions in the same year, which could result in an unusually high tax bill or even push you into a higher tax bracket.

Withdrawals from Roth 401(k)s are also required each year, but generally distributions from a Roth account are tax free. You are not required to take a distribution from a Roth IRA (as a helpful hint, if you are no longer working, you can roll your Roth 401(k) balance into a Roth IRA and the funds would no longer be subject to a required minimum distribution).

If you have multiple Traditional IRA accounts, you can sum up the total required minimum distributions for all accounts and elect to take that amount from as few as just one of your accounts. In contrast, if you have multiple 401(k) accounts, a required minimum distribution must be taken from each account. Consolidation of accounts could help cut back on this particular headache for future years.

Donate your RMD to charity. IRA owners who are age 70 1/2 or older, don’t need the income and feel charitably-inclined can transfer up to $100,000 per year directly to a qualifying charity. Distributions directly to charity allow the IRA owner to avoid paying income tax on the transaction. This can also be used to satisfy your minimum distribution requirement.