Understanding your RMD

By Michael Cave

I get a lot of questions every year from clients approaching age 70 about their traditional IRA accounts. Here are a few of the most frequent.
  • What is RMD? RMD stands for required minimum distributions, the minimum amount that the IRA account owner must withdraw in the year he or she reaches age 70 1/2 and every year thereafter.

  • Is the RMD taxed? Yes, the account owner is taxed on their income tax rate on the amount withdrawn.

  • What if I don't take my RMD? Don't even think about it! There is a penalty of 50 percent on the amount not withdrawn.

    Can I take more than the RMD? Yes, but remember you are being taxed at your ordinary income tax rate on the full amount withdrawn.

    How is the RMD calculated? RMD is calculated by dividing the prior December 31 balance of your IRA account by a life expectancy factor the IRS publishes in Publication 590. You or the custodian of your IRA account can figure out the amount. Or check with your CPA, tax preparer or financial advisor.

  • What do I do with my IRA mandatory distribution? This is my favorite question from a senior. You can do anything you want with your RMD! Save it, spend it, invest it, fund a grandchild's college 529 plan or leverage that distribution into a life policy with a much larger death benefit, payable tax-free to a beneficiary or beneficiaries of your choosing.
If I didn't address your question, go to www.IRS.gov then search RMD questions. Make sure to get a copy of IRS Publication 590, mentioned earlier in this piece.

God Bless America!