Required minimum distributions (RMDs) must begin from most of your retirement accounts at age 70 ½. But it is not as easy as just looking at when you are 70 ½.
First of all, it is not when you actually turn 70 ½. Your required distributions begin in the year you turn 70 ½. That means that those of us who are born from January through June turn 70 ½ in the same year we turn 70. For the rest of us who are born from July through December, we turn 70 ½ in the year we turn 71.
Secondly, your first required distribution doesn’t have to be made until April 1st of the year after you turn 70 ½. This is called your required beginning date (RBD). Here is how this all works together.
Example 1: Wayne turns 70 on January 15, 2017. He will be 70 ½ on July 15, 2017. Wayne will have to take his first RMD in 2017. He can wait as late as April 1, 2018 to take his first RMD.
Example 2: Peggy turns 70 on August 3, 2017. Peggy will be 70 ½ on February 3, 2018. She will have to take her first RMD in 2018 but she can wait as late as April 1, 2019 to take her first RMD.
There is a consequence for delaying your first RMD to the following year. You will have to take two RMDs in that year. In the Wayne example above, he can wait until 2018 to take his 2017 RMD. If he does that, he also has to take his 2018 RMD by the end of 2018. For most individuals, doubling up on income in one year does not make sense from an income tax perspective.
There is another rule that comes into play when you reach the year you turn 70 ½ and that is that you must take your RMD before you can do a rollover of any other funds in the retirement account. Following is a list of transactions considered rollovers for this rule:
- 60-day rollovers (you receive the funds payable to you and have 60 days to redeposit them in another retirement account)
- Roth conversions
- Any distribution from an employer plan (401(k), 403(b), pension, etc.), either a direct transfer or a check payable to the plan participant
It doesn’t matter that you would have the option to wait until the end of the year or until April 1 of next year to take the RMD. The first money out is considered the RMD and the RMD cannot be rolled over. It must be paid out before moving funds out of an employer plan or before doing a Roth conversion or before doing a 60-day rollover. However, for IRA accounts, an RMD can be transferred from one account to another and taken later in the year from the new account.
Example 3: Wayne has funds in his employer’s 401(k) plan. He wants to move those funds to an IRA. Wayne will have to take his RMD from the 401(k) before he can move the remaining balance to an IRA.
Example 4: Wayne has funds in an IRA account. He wants to move those funds to a new IRA custodian. The funds will go in a direct transfer to the new custodian. Wayne will not have any access to the funds as they are moved from the old custodian to the new custodian. Wayne does not have to take his RMD before he does the transfer of his IRA to the new custodian.
Finally, if you die before your RBD (April 1 after the year you turn 70 ½), you are considered to have died before you have to take any RMD.
Example 5: Angela turns 70 on May 28, 2017. She will be 70 ½ on November 28, 2017 so she has an RMD for 2017. Angela takes half of her RMD in October 2017. Unfortunately, Angela dies on December 12, 2017. She no longer has an RMD for 2017 even though she already took half of her RMD because she died before her RBD. Her beneficiaries will not be required to take any further funds from the inherited IRA to satisfy Angela’s year of death RMD.