If you are 70 and older

Joe Nelson |

More people than ever are reaching the milestone age of 70. If you are fortunate enough to reach 70 years old, there is one financial rule you must know and heed. 

It is a rule that is not well publicized, but you should know it by heart. 

The rule is: You must withdraw a minimum amount – using a pre-figured calculation - from your tax deferred retirement plan(s) for the rest of your life. The term the IRS uses is Minimum Distribution (RMD). 

You can always take out more than the RMD each year, but you must at least take out the minimum. 

The reason this is so important is that if you don’t take out the RMD, the penalty is 50% of the amount you should have withdrawn! Yeah, they aren’t messing around with this rule. I guess since you haven’t paid taxes on any of the money, maybe for decades, they figure they have to force you to take at least some of the money out and pay taxes on it. 

There is one little addendum to this rule: You don’t have to take out the FIRST withdrawal until the April 1st of the year following the year you turn 70½. This usually means you don’t have to take the first withdrawal out until you are 71. (Sounds like a government rule doesn’t it?) 

If you choose to delay the FIRST withdrawal, you must realize that you will have to take out 2 withdrawals that year - the one you delayed AND the one you have to take out for the current year. That means you need to do some calculations to see which way is best for you to take the first withdrawal. 

But don’t worry too much about taking out the minimum withdrawal, the first year it can be as low at 1/27.4 of the amount of your IRA or about 3.65% of the value at the end of the previous year. 

The calculation works like this: 

1. Get the value of your IRA as of the end of the previous year 

2. Find the RMD figure for your age (I have the RMD chart if you would like to have a copy.) 

3. Divide the value of your IRA by the RMD number – That is the amount you must withdraw. 

 

For instance, if your IRA was valued at $250,000 at the end of 2018, and you are 70 years old, your RMD number is 27.4, then your minimum withdrawal for 2019 would be $9,124.09 or 3.65%. 

The above hypothetical figures are for illustrative purposes only. 

 None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation.