Your Money – You Can’t Take it with You

At age 70 ½ the government (Uncle Sam), wants you to start taking money out of your tax-deferred retirement accounts.  You know, your 401K, your IRA.  Any retirement account that you have put part of your income into over the years to avoid paying tax on it.  Now they want you to take a RMD (Required Minimum Distribution).  That’s IRS talk for, you’d better start paying taxes on that tax-deferred money.  They figure, you have avoided the taxes long enough and they want their cut, before you leave this earth.

So, if they force you to take money from your retirement, how do you determine how much?  Well there is a calculation to come up with the minimum distribution amount.  Most people have multiple accounts from changing jobs and not rolling over old accounts to consolidate.  You start by taking the total account value on December 31st of the previous year of all retirement accounts (except ROTH IRAs); and you add them together to get one total balance.  The IRS has a chart called the Uniform Life Table.   The table will have a number for each age.   Find your age on the table for the corresponding formula value.  For example age 70 is 27.4, age 71 is 26.5, and so on.  With each year you get older, the factor goes down.   Final step is to take the account value balance and divide by the factor. (IE: A 70yr old with a $100,000 balance would have an RMD of $3,650.) 100,000 divided by 27.4.

RMDs are required to be taken in the calendar year, with one exception.  Your first distribution can be taken as late as April 1st of the year after you turn 70 ½ .  Just keep in mind that the distributions are taxed in the year you take them.  So if you wait to take the distribution in the first quarter of the next year, you will still be required to take a distribution by December 31st of that subsequent year, which will result in declaring both distributions as taxable income in the same year.  Especially when you factor in the half age thing.  Being born on July 1st could really have some advantages.

If you fail to take the total amount of the RMD in time, you will have to pay a 50% penalty on any shortage.  Our $3,650 number from above, would mean you have a $1,825 penalty and you still have to take out the original $3,650.

So no matter how much we would like it, the reality is we can’t take it with us, when we depart.  And even at death, the tax man is going to get his cut.

About the author  ⁄ Van Pappas

Van Pappas

Van Pappas, CFP® - Van is a native of Atlanta. He holds his undergraduate degree in Finance with an emphasis in Real Estate. As a planner for 15 years, he earned his CFP designation from Kaplan University. He is currently the Chairman and founder of the Chamblee Chamber of Commerce and sits on the Downtown Development Authority for the City of Chamblee. In 2012, he noticed the value of helping the X-Y Generations and decided to merge his practice with oXYGen Financial. Background and qualification information is available at FINRA's BrokerCheck website.Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

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