Who Is Affected?
All taxpayers born before July 1, 1945 with money in a workplace retirement plan, like a 401k plan, 457b plans, or a 403b plan, or an traditional individual retirement plan (IRA), Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE) must take required retirement plan distributions of a minimum amount before the end of the calendar year.
Taxpayers born after June 30, 1944 and before July 1, 1945 are eligible for a special rule that allows them to wait until as late as April 1, 2016 to take their first required retirement plan distributions. Payments made to these taxpayers in early 2016 can count toward their 2015 required distribution, but are still taxable in 2016. For all subsequent years, the required distribution must be made by December 31.
For certain retirement plans, employees who are still working can postpone taking these distributions until April 1 of the year after they retire. The required distribution rules do not apply to owners of Roth IRAs while the original owner is alive.
How Much Money Must Be Withdrawn?
The amount of the required retirement plan distributions that must be taken is based on a calculation that includes the taxpayer’s life expectancy on December 31, 2015 and their account balance on December 31, 2014. In most cases, the amount of the required withdrawal will be reported by the IRA trustee on Form 5498 in Box 12b.
For example, based on Table III (Uniform Lifetime Table) in IRS Publication 590-B, a taxpayer who turned 72 in 2015 would have a life expectancy of 25.6 years. There is a different table for taxpayers who name a spouse more than 10 years younger than them as their only beneficiary.
The typical taxpayer turning 70 ½ this year has a 3.6 percent required distribution amount, meaning they must withdraw that percentage of the total value of their retirement accounts. If all of the taxpayer’s eligible retirement accounts added up to $100,000, they would take a $3,600 distribution and pay $900 in taxes, assuming that they fell within a 25 percent tax bracket.
What Is The Penalty?
The penalty for failing to take this payment by the end of the year is 50 percent of what should have been withdrawn. For the average taxpayer, this could amount to thousands of dollars.
Other Things To Know
Required retirement plan distributions from multiple IRAs or workplace retirement plan accounts can be taken from each account or the amounts can be combined with like accounts and taken from just one account. For example, if you have two eligible IRAs, the withdrawal amounts for both accounts can be taken from a single account. However, the withdrawal amount for an IRA cannot be taken from a 401k account and vice versa.