Understanding Required Minimum Distributions (RMD)with Your IRA

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IRA’s can be complex and confusing sometimes. There are so many rules and laws that must be followed to avoid penalties. One common area of confusion surrounds the required minimum distribution (RMD). The RMD is simply the minimum amount that an IRA holder must withdraw from their account once they hit the mandatory age to avoid being hit with penalties. This mandatory age varies from state to state but is typically age 70 ½ in most states.

When dealing with any aspects of your financial life, especially your IRA’s, it is always best to consult a financial planner that has experience in IRAs and tax laws.

Required minimum distributions seem to create the most questions when it comes to traditional IRAs. One of the most common questions pertains to taxes. Will the RMD be taxed? This depends on how your IRA is set up. If your IRA contributions are done pre-tax, then the answer to that is yes. You will pay taxes on the RMD. If you had your contributions taxed at the time of the contribution (which is not the typical scenario) you will not have your distribution taxed. Just remember that at some point taxes will have to be paid on this money. If you didn’t pay taxes when you made the contribution you will pay taxes at distribution.

The amount that you receive from your RMD is calculated based on the total account of your IRA balance divided by the distribution period. The IRS has worksheets available that allow you to calculate exactly what your personal distribution period is and what your distribution amount will be.

So what happens if you choose not to take your RMD after you’ve reached the mandatory age? The IRS strongly discourages that by charging you an excise tax on the amount that should have been distributed. This can be up to 50% of the distribution amount. It’s definitely in your best interest to receive the distribution, even if you just want to put it into savings.

Another common question we see concerns that amount above the RMD that you’re allowed to take. The IRS does allow you to take more than the RMD, just remember that taxes will still be applied to this amount. You cannot take more than the required amount and then skip taking an RMD the following year, nor can you apply any portion of what you take one year to your RMD the following year. These rules are very clearly spelled out.

The bottom line with your RMD is that there are very specific rules about what you can and cannot do. Your financial advisor should be aware of these rules and can help you with specific questions that pertain to your situation.

The estate lawyers of Krause Donovan Estate Law Partners, LLC practice law in the areas of Probate, Wills, Estate Planning, and Trusts. We assist clients in and around Madison, Wisconsin, and Rockford, Illinois, with all matters related to estate planning, trusts, and probate matters. Submit our online form to request a consultation.

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