Required Minimum Distributions (RMDs)

The Rule

A required minimum distribution or RMD is the amount that Traditional, Rollover, SEP and SIMPLE IRA owners must withdraw by April 1st the year after they reach 70 ½ and then by December 31st every year thereafter. Qualified plan participants may also be subject to required minimum distributions.

The Calculation

In simple terms, the distribution is calculated using the fair market value of the account on December 31st of the previous year divided by the applicable distribution factor based on the applicable Life Expectancy tables. Clients that must begin taking RMDs will get a notice from Commerce Brokerage Services. If a position is held directly with an annuity or a mutual fund company you should receive a similar letter from them. This letter has everything you need to know about the RMD calculation and even shows your required minimum distribution amount and its due date, which is similar to IRS Form 5498. For your convenience, there is a RMD calculator available through the Commerce Brokerage Services website.

The Combination

If you have more than one retirement account, you are allowed to combine your RMD in to one withdrawal from one of your retirement accounts. However, you are only allowed to combine the withdrawal with similar accounts. For example, if you have multiple Traditional IRA accounts, you can add the RMD amount due on all those accounts together and withdraw that single total from just one of the Traditional IRA accounts. Similarly, if you have multiple 403 (b) plans, you can combine the required minimum distributions and make the withdrawal from one 403 (b) account. However, you may not combine the RMD’s from a Traditional IRA and 403 (b) to make a withdrawal from one account. There are other combinations to consider, as well, so we encourage you to discuss your plans with a Financial Advisor.

The Penalty

If you do not take your RMD by the appropriate date, the IRS may impose a 50% excise penalty on the difference between your RMD amount and the amount you withdraw. For example, if your RMD amount is $10,000 for a given year and you make no withdrawals, you could owe the IRS $5,000 in penalties.

The Exception to the Rule

There is an exception to the required minimum distribution rule. Some qualified plans will allow participants to defer beginning their RMDs until they retire. Only the employer or the qualified plan administrators will know for sure, so please consult them.

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