Once you turn 70½ this tax requirement may apply to you

If your retirement plan includes tax-advantaged accounts, there is a particular tax rule you should know about: required minimum distributions, or RMDs. This tax rule can be complicated, but the following commonly-asked questions can help you understand how it works and how it may apply to you. Q: What are RMDs? A: Required minimum distributions are retirement account withdrawals mandated by the IRS once you reach age 70½. By requiring you to withdraw a portion of your savings, the IRS is able to tax income that has been allowed to grow tax-free.

Q: What types of accounts fall under these tax rules?

A: RMDs generally apply to all tax-deferred retirement accounts, including traditional IRAs, SEP IRAs and SIMPLE IRA plans. An inherited IRA is also subject to these tax rules. Roth IRAs are exempt from this requirement because they are funded with after-tax dollars.

Q: When do I need to withdraw RMDs?

A: RMDs are an annual obligation once you reach age 70½. In the year you turn 70½, your first RMD is due by April 1 of the following year. Thereafter, you must withdraw the required amount by Dec. 31 each year. (There is one exception to the 70½ rule: If you are still working and participate in a 401(k), profit sharing, 403(b) or other defined contribution plan, you can — if allowed by the terms of the plan document — generally wait until retirement to make RMDs from this type of retirement account.) Q: How are RMDs calculated? A: Your life expectancy is a factor in your RMD calculation. The IRS provides life expectancy charts and worksheets to help you determine how much you need to take from your IRA. The calculation is different if you participate in a Defined Contribution Plan, however the plan administrator often will calculate your RMD for you. Your financial advisor and tax advisor can help you plan for and make the appropriate withdrawals to meet the requirement.

Q: What if I own multiple accounts?

A: Once you turn 70½, each eligible account you own will have an RMD requirement. If you own multiple IRAs, you can choose to add up the RMD amount for each account and withdraw the total from one eligible account to satisfy the requirement for all of your accounts.

Q: Can I withdraw the same amount every year?

A: RMDs are not something you can set and forget. The amount you are required to withdraw can change each year,

Bronwyn Martin