Understanding IRA Required Minimum Distributions

By: Jan Paul Ferrer

 

IRAs are an important part of many investors’ nest eggs. Know the rules for how to withdraw funds from them for your retirement.

Individual retirement accounts (IRAs) play a key role in helping Americans save for retirement. In 2018, IRAs represented one-third of total U.S. retirement assets, providing an important income source for retirees.1

But, just as you formed a strategy and adhered to rules for investing in your IRA, you must also understand when and how to take your required minimum distributions (RMDs). The answers to these questions may help your distribution strategy meet legal requirements and your personal needs, too.

When do I need to start taking IRA distributions?

If you own a Traditional, SEP, SAR-SEP, or SIMPLE IRA account—you may begin taking penalty tax-free distributions from your account at age 59½. But you must begin taking RMDs from your IRA account for the year in which you attain age 70½. However, you are permitted to delay the fi rst distribution until April 1 of the year after you turn 70½. This is called your Required Beginning Date (RBD). After the year in which you turn 70½, RMDs must be taken by December 31 of each year.

Note that if you own several IRAs, the RMD must be calculated separately for each IRA but the total of all RMDs generally may be withdrawn from any one (or more) IRA account(s) (other than Roth IRAs and inherited IRAs). Roth IRA accounts do not require distributions until the death of the owner.

However, failing to take RMDs as required can be expensive. If you receive less than your RMD amount for the calendar year, you are generally required to fill out IRS Form 5329 and are generally subject to a 50% excise penalty tax on the amount that should have been distributed but was not.

Calculating RMDs

RMDs are calculated using your life expectancy. Of course, no one knows for certain what that is, but the IRS provides two methods for lifetime RMD calculation purposes: the uniform lifetime table and the joint life expectancy table. These tables can be found at the IRS website (www.irs.gov) along with worksheets and instructions on how to perform the calculation. In general, you’ll use the uniform lifetime table to calculate your RMD, unless you qualify to use the joint life expectancy table and choose to use it. If your spouse is your benefi ciary and is more than 10 years younger than you, you can choose to use the joint life expectancy table.

May I make changes once I start receiving RMDs?

Even after you’ve begun taking RMDs, you can make a variety of changes to your account and distributions. You can always increase the amount of your distribution beyond the RMD, but keep in mind that excess amounts cannot be applied toward the RMDs of future years. Your benefi ciary information may be updated at any time. In general, you must notify the IRA custodian or trustee in writing and you may be required to submit certain forms. You may even change from the uniform table RMD calculation method to the joint life expectancy method if you name your spouse as the sole primary benefi ciary for the entire calendar year and your spouse is more than 10 years younger than you. Your marital status is determined as of January 1 of each distribution year.

Getting your RMDs right once you turn 70½ is an important part of your retirement income plan. A Financial Advisor who is familiar with your unique circumstances can help you structure a comprehensive plan to help you stay on track to meet your retirement goals.

Footnotes

1 “The Role of IRAs in US Households’ Saving for Retirement, 2018”, ICI Research Perspective, December 2018, https://www.ici.org/pdf/ per24-10.pdf . Disclosures Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor. Jan Paul C. Ferrer is a Financial Advisor in Chicago, IL at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). He can be reached by email at janpaul.ferrer@ morganstanley.com or by telephone at 312 312-419-3535 This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual fi nancial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affi liates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fi duciaries” (under the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley. com/disclosures/dol . Individuals are encouraged to consult their tax and legal advisors regarding any potential tax and related consequences of any investments made under an IRA. Jan Paul C. Ferrer.may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where [he/she] is registered or excluded or exempted from registration, https://advisor.morganstanley. com/janpaul.ferrer ©2019 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 2380150 01/2019