A ‘ReMinDer’ for those born in first half of ’48
Did you turn 70 between Jan. 1, 2018, and June 30, 2018? If you did, you also turned 701/2 in 2018. Congratulations. Or, better yet, congratulations to the IRS and the U.S. Treasury.
Now that you are 701/2, the IRS wants you to start taking money out of your traditional individual retirement accounts (and other tax-deferred retirement accounts, with some exceptions). Why? To start taxing those IRA withdrawals.
April 1, 2019, is an important date for you. If you did not take out the required minimum distribution for 2018, you still have time — but only a few weeks. April 1 is your deadline for taking your first RMD.
This is what you need to know:
1) RMDs are mandated yearly withdrawals that must occur each and every year over your lifetime after you reach the age of 701/2.
2) Each withdrawal from a traditional IRA (not Roth IRAs) is subject to income taxes.
3) RMD amounts that are not withdrawn on time are dangerous. That is, any amount that should have been withdrawn but was not subjects you to a penalty of 50 percent (that’s not a typo).
4) Your first RMD can be paid in the year you turn 701/2, or you can opt to wait until April 1 of the following year (called the “required beginning date”). That’s April 1, 2019, for those of you who were born in 1948 in the first half of the year (before July 1, 1948).
So, let’s take an example of “John” (born Jan. 1, 1948), who has $100,000 in his traditional IRA at the end of the 2017 year. He is not married and has no other IRAs or retirement accounts. Say John did not know about RMDs, or that he was hospitalized at the end of the year. Now, having read this column, he knows he needs to act. What should he do?
John’s 2018 RMD is $3,650, which is calculated on the Dec. 31, 2017, value ($100,000) divided by 27.4, the divisor mandated by the IRS in Table III of IRS Publication 590-B (”Distributions from Individual Retirement Arrangements (IRAs)”).
John would need to take $3,650 out of his IRA before April 1, 2019, to satisfy his 2018 RMD. But it’s important that John not forget to take his 2019 RMD before the end of 2019. That means he would be taking two RMDs in 2019. That will not happen again, since RMDs are yearly mandates. There is only one exception to this rule and that’s the first year only, as in John’s case.
If John forgets to act before April 1, he will owe the IRS a penalty of 50 percent of the $3,650 he did not withdraw on time. That’s a penalty of $1,825.
For help on this very important topic, the IRS website offers a clear explanation at tinyurl.com/ybxvl9h6.
Importantly, the first data point is “When do I take my first RMD?”
For IRAs, including SEP, SIMPLE and SARSEP IRAs, the IRS link confirms that “you must take your first RMD by April 1 of the year following the year in which you turn 701/2, regardless of whether you are still employed.”
For defined contribution plans, such as your 401(k), your first RMD could be a later date. “April 1 of the year following the later of the year you turn 701/2 or the year you retire (if allowed by your plan). If you are a 5 percent owner [of the employer], you must start RMDs by April 1 of the year following the year you turn 701/2.”
Another excellent IRS resource is http://tinyurl.com/gr7dhap You’ll also want to review the calculations, which you can do here: tinyurl.com/y7xjf8lt.
Also check out Fidelity’s “Options for taking your first RMD” at tinyurl.com/yyvtc73u.
For this special situation (a forgotten first RMD), be careful about using online RMD calculators. A few I’ve looked at only calculate the current year’s RMD (2019), which would be based on another divisor (26.5) than the RMD John needs to take before April 1. Also, as pointed out by Joe Gaynor, Director of Retirement & Income Solutions at Fidelity Investments, be aware that people born earlier (between July 1, 1947 and Dec. 31, 1947), also turned 701/2 in 2018. They also have an RMD obligation for 2018.
On another note, I’m thinking of my next book project. Would you read a book that discussed market insights and techniques to manage retirement portfolios? There are many books on the subject of retirement investing, including a few of my own, which you can see on my website (juliejason.com). This one would focus on what you need to know and do to create income for life, offset inflation and taxes, and potentially leave a legacy for your family and charity, based on my 25 years of real-life experience doing just that for high-net-worth families. If you would like to help me decide on a title for the book, I welcome your thoughts. Please take this short survey at surveymonkey.com/r/BookTitle or email me at email@example.com or send me an email at firstname.lastname@example.org.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (email@example.com). Her awards include the 2018 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.