Advisor Blog

The Worker, Retiree and Employer Recovery Act of 2008 provided a temporary respite from Required Minimum Distributions (RMDs) in 2009.  However, RMDs are once again a requirement for 2010 and the penalty for failing to take them can be significant.

Uncle Sam giveth and Uncle Sam taketh away.  The benefit of

being able to defer taxes on contributions to IRAs and employer sponsored retirement plans comes at a cost.  The contributions and all of the gains will be taxed when distributions are made from the tax-deferred account.  Most people understand this.  Now, wouldn't it be nice if you could just leave that money in the tax-deferred account if you don't need it and never pay taxes on it?  Of course it would.  But, don't think that the IRS is going to let you.  That's the purpose of the RMD.  It forces you to take distributions starting at age 70 1/2.  We got a temporary break in 2009, but don't get used to it.

RMDs apply to traditional IRA accounts, SIMPLE IRAs, SEP IRAs, inherited IRAs, beneficiary IRAs and many employer sponsored plans, like 401(k) or 403(b) plans.  If you are age 70 1/2 and have these types of accounts or you are the beneficiary of an IRA that elected to receive payments over your lifetime, you need to be sure that you are paying attention to the RMD requirements.  Fortunately, the RMD amount is easy to calculate.  It is a simple formula based on the account value at the end of the previous year and an IRS life expectancy table.  There are a number of web-based calculators that you can use to figure it yourself.  Of course, we always recommend that you check with your tax professional on this or any tax matter.