Do you celebrate your Half Birthday? The IRS does. Did you celebrate your 70½ birthday in 2019? Uncle Sam wants to wish you a Happy Birthday.

What is an RMD?

As a Birthday present, the IRS will require you to take before April 1, 2020 a so-called Required Minimum Distribution (”RMD”) from your retirement accounts. You must take these from your traditional IRAs (but not your Roth IRAs.) Why? Paternalistically, the tax rules require minimum annual distributions be made to help assure that IRAs are used primarily to provide for retirement, rather than as a family tax shelter for future generations. Realistically, the government needs the tax revenue.

Your first required distribution year is the year you turn age 70½. But this distribution can be made as late as April 1, 2020. For each year thereafter, the required minimum distribution must be made annually by December 31st. If you wait until April 1, 2020 to take your first RMD, you will have to take two distributions in 2020 - one for 2019 and one for 2020. This bunching on income could negatively impact your income taxes. If so, you may want to take your first distribution before December 31, 2019.

How to calculate the RMD

Annually the required minimum distribution is calculated by dividing the IRA balance as of December 31 of the preceding calendar year by the applicable life expectancy factor. More good news - the IRS thinks you will live another 27.4 years! You are going to live to almost 100! Complications, in the computation, may arise if you have more than one IRA account. The RMD is based on the total of all the accounts, but you can take the funds from any account, or a combination of the accounts.

What’s at stake if you don’t take the RMD?

IRA trustees are required to report the required distribution amount to IRA owners, or to calculate it for the owners on request, by January 31 of the year the distribution is required. However, as the required minimum distribution can be withdrawn from whichever IRA you chose, you are responsible for ensuring the proper amount is timely received. You could be hit with a 50% penalty tax if you don’t withdraw the required minimum amounts each year. It is your responsibility to take the RMD, not the Trustees.

Annual distributions are also required to be made from your employer’s qualified plan. Generally, the plan administrator is responsible for calculating and timely paying the RMD amount from qualified retirement plans.

So, Happy Half Birthday and, you have some planning to do before New Year’s. Let our Tax Services Team help you plan- contact us anytime.