Required Minimum Distributions
Continuing to participate in your deferred compensation plan through retirement may be a good idea, potentially continuing to grow your investments. There are limits though, to how long you can keep your money in the plan before you have to take annual minimum withdrawals. If you don’t take timely required withdrawals from your account, you’ll be subject an IRS 50 percent tax penalty on the amount that should have been withdrawn – referred to by the IRS as an excise tax.1
When you retire, the IRS generally requires you to start taking required minimum distributions (RMD) payouts from your account.
Generally, the latest you can wait to begin taking RMDs is April 1 of the calendar year after the year in which you reach age 70½ (if you were born before July 1, 1949) or age 72 (if you were born after June 30, 1949) or the year in which you retire or separate from employment, whichever is later. The amount of your RMD is normally based on your account value as of the previous year end; however, if you wait until the last possible date to take your first RMD, it will be based on your year-end account value two years prior.
Example: You turn 72 on June 1, 2020. You can wait until April 1, 2021 to take your first RMD, but it will be based on your account value as of December 31, 2019.
Example: You turned 70 on June 1, 2019. You reached age 70 ½ on December 1, 2019. You can wait until April 1, 2020 to take your first RMD (for 2019), but it will be based on your account value as of December 31, 2018.
Example: You turned 70 on July 1, 2019. You reached age 70 ½ on January 1, 2020. You can wait until April 1, 2022 to take your first RMD (April 1st of the year after you reach age 72).
If you defer your first RMD to the last possible date, you’d have to take your second RMD by December 31, 2021 and the amount would be based on your account value as of December 31, 2020.
Visit the IRS website to review the frequently asked questions about RMDs, and calculate what your RMD may be.
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1 Internal Revenue Code Section 4974
Investing involves market risk, including possible loss of the money invested.