Q. I have a 401(k) and several IRAs. Next year, I’ll have to start taking Required Minimum Distributions (RMDs). Do I have to take an RMD from each account?
— Planning ahead
A. Here’s a way you can make your life much easier.
First, the background.
The owner of a 401(k) plan, Simple IRA, SEP IRA or regular IRA must start taking mandatory withdrawals — RMDs — when they turn 70½ years old.
The general rule is you must take your first RMD by April 1 of the year after the year you turn 70½, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
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“If you were born in January to June, you turn 70½ in the same calendar year that you turned 70 in,” Kiely said. “So, you must take your first RMD in the following year.”
If you were born in July to December, he said, you turn 70 in one calendar year, and you turn 70½ in the subsequent calendar year. This person can put off their first RMD until year three.
“However, if you were born in July to December and put off your first RMD until year three you would be required to take two RMDs in that third year — your age 70 distribution as well as your age 71 distribution,” Kiely said. “I usually advise people to take their first RMD in year two to avoid this bunching of two RMDs in one year.”
Now specifically to your question:
Kiely said you calculate each year’s RMD by taking the total account balances from all your accounts from the prior year end and dividing the total with a factor from an IRS table. This results in the total amount you must withdraw from your retirement accounts.
“You must take the total amount out, but you do not have to take some out of each account. If you don’t take a required distribution the penalty is 50%,” he said. “That’s 50% of the missed distribution, not 50% more tax.”
Kiely said he tells his clients that “simple is better than complex in retirement.”
He recommends clients roll their 401(k) accounts into their IRA. Additionally, he recommends they have only two IRA accounts: one a regular IRA and one Roth IRA..
“When you combine retirement accounts, it makes managing them much easier,” he said. “It also makes calculating and taking RMDs much easier.”
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Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.