If you are one of the 2.5 million baby boomers turning 70 this year, you may be required to take a minimum taxable distribution from your IRA accounts before the year ends. However, if you fall into one of the following categories listed below, the IRA RMD rules may not apply to you.
You are too young. The IRS says that you must begin taking required minimum distributions by April 1st of the year after the year you turn 70 ½ . If you were born on July 1 of 1946 or later, no IRA RMD is required for 2016. If you were born before July 1, 1946 you are over age 70 ½ and will have an IRA RMD requirement for 2016.
You haven’t reached your Required Beginning Date. The IRS says you must take your first IRA RMD no later than April 1 of the year after the year you turned 70 ½ . Known as the Required Beginning Date, this is the latest possible date for you to take your first IRA RMD. If your 70th birthday was in the first half of 2016, then you turned 70 ½ at some point during the second half of this year. Your IRA still has an RMD for 2016, but the IRS gives you until April 1 of 2017 to take your first one. While you are allowed to delay your first IRA RMD a little longer, waiting until 2017 means that you will have two required minimum distributions next year – one for 2016 that you must take by April 1, 2017, and one for 2017 that you must take by December 31, 2017.
Your IRA is a Roth IRA (but not an inherited Roth IRA). One of the benefits of a Roth IRA is that there is no required minimum distribution. Money in these accounts can continue to grow tax-free for the rest of your life with no requirement to take money out. That changes when you die. When you die your Roth IRA will be passed to your beneficiaries who will be required to take out a minimum distribution each year based on their age and the value of the account at the end of the previous year.
Your IRA is really a 401(k) and you are still working. IRAs and 401ks both have required minimum distributions, but there is an exception to the rule. If you have a 401k at work, and continue to work at that employer past age 70 ½ , you do not have an RMD on your 401k until April 1 of the year after the year you quit working for that employer. However, there is an exception to the exception. If you own 5% or more of your company, you still must complete an RMD from your workplace 401k. Remember, this exception does not apply to workers who contribute to IRAs, SEP IRAs or SIMPLE IRAs. Nor does it apply to old 401k balances you may have with any previous employers. If you are older than 70 ½, those IRAs (or 401ks) would still have RMDs for 2016.
Missing an IRA Required Minimum Distribution (aka RMD) can be an expensive mistake. The penalty for a missed IRA RMD is 50% of the RMD amount.
Most IRA custodians will calculate the required minimum distribution for you. If you are still unsure of whether your RMD has been met, contact your IRA custodian or financial advisor.
Don’t delay. The deadline for IRA RMDs (other than your very first one, as described above) is December 31, 2016.