Are you required to take an IRA minimum distribution? Decoding RMDs

What goes up, must come down. And what goes in, must come out. And that's certainly the case with your individual retirement arrangement, otherwise known as your IRA.

Generally, you have to start taking a minimum amount — it's called a required minimum distribution or RMD — from your IRA, SIMPLE IRA, SEP IRA, or retirement plan account when you reach age 70½, according to the IRS. If you own an inherited IRA, you're required to take RMDs, as well. (Roth IRAs, by the way, don't require withdrawals until after the death of the owner.)

So, that's the easy part. Own an IRA; turn 70½; and take a RMD. The hard part? All the rules and traps for IRA owners who have to take RMDs.

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Here's what experts say those subject to RMDs should do and/or know.

Required beginning date for your first RMD. You must take your first RMD by April 1 of the year following the year in which you turn 70½, regardless of whether you are still employed. The rules differ for defined contribution account owners; they — in some case — can wait until they retire.

"A person's first RMD must be taken by this time," says Jeffrey Levine, a certified public accountant and IRA technical consultant with Ed Slott and Co. in Rockville Centre, N.Y. "However, if they wait until the year after they turn 70½ to take their first RMD, up to April 1, they will have to take two RMDs for that year. One by April 1 for the prior year and another by Dec. 31 for the current year."

And that's something to avoid, says James Shambo, president of Lifetime Planning Concepts in Colorado Springs, Colo. Two RMDs will increase your tax bill, and possibly push you into the next highest marginal tax bracket.

But since you might not know the best course of action in advance, Shambo suggests preparing a two-year tax projection to determine the optimal timing of the first two distributions.

One tricky part about your required beginning date, or RBD, is this. "70½ results in different beginning distribution ages depending on the month a person is born," says Shambo.

If born in the first six months of the year, a person turns 70½ in the year they turn 70. If born in the last six months of the year, a person turns 70½ in the year they turn 71. "This is important since the RMD is calculated by dividing the prior year-end account balance by the 'person's age' at the end of each distribution year," says Shambo. "So it is important that folks calculate the correct age for each year."

Calculating your RMD. The RMD for any year is your account balance as of the end of the preceding calendar year divided by your life expectancy factor, which can be found in IRS's Uniform Lifetime Table at irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf.

Read Required Minimum Distribution Worksheets.

Date for subsequent RMDs. After the first year for RMDs, all future RMDs must be taken by Dec. 31. Given that, add this to your year-end to-do list: In November or early December, take your RMD, and make sure it's the correct amount, says Levine.

Jean-Luc Bourdon, certified public accountant and principal at BrightPath Wealth Planning, in Santa Barbara, Calif., says it's easy for retirees to forget to take their RMD. "Checking or double-checking is important this time of year," he says.

If you're worried about taking the correct RMD each and every year, set up an automatic RMD plan with your IRA custodian. In many cases, your custodian will calculate your RMD and send you a check for that amount on the date you designate. Have your custodian do this in November so you have time to correct any mistakes.

What if you don't take your RMD? Speaking of mistakes, if, for whatever reason, you forget to take your RMD, try to fix this mistake immediately, says Levine. "Take all back RMDs as quickly as possible," he says.

And then file IRS Form 5329 for each year missed. Levine's advice: Attach a note explaining the reason why the RMD was missed — bad advice, health issues and the like — and indicate that your RMDs will be taken timely in future years.

Of note, failure to take a required distribution results in a 50% penalty based on the distribution not made, says Shambo. "If, however, a taxpayer corrects the error as soon as it is discovered by making the distribution and reporting the income, they can request the penalty be waived," he says. "I have never seen this not waived as long as the taxpayer reacted and corrected immediately upon discovery."

What about RMDs after the account owner dies? What happens to RMDs after the account owner dies is a bit complicated. In general, if a person other than a spouse inherits an IRA, they must generally begin taking RMDs by Dec. 31 of the year after the year of death, says Levine.

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What to do with your RMD. If you don't need your RMD for living expenses, consider ways to put your RMD to good use: Fund a grandchild's 529 college savings account or re-invest the money in your IRA or Roth IRA if you qualify to do so.

Check your beneficiary designations. While checking and double-checking all things RMD, year's end is a good time to review the beneficiary designations on your retirement accounts and, says Bourdon, to consider giving someone power of attorney over the accounts.

Says Bourdon: "With cognitive decline being part of retirement risks to mitigate, it is helpful to have someone ready to swing into action if needed."

Do RMDs apply to my retirement plan?

Minimum distribution rules apply to all of these:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k) plans
• 403(b) plans
• 457(b) plans
• Profit-sharing plans
• Other defined contribution plans

Source: IRS.gov

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email Bob at rpowell@allthingsretirement.com.