RMD. It sounds like a disease — a chronic condition afflicting those who save for retirement in tax-advantaged accounts.

Required minimum distribution

Age of retiree Distribution period (in years)
70 27.4
75 22.9
80 18.7
85 14.8
90 11.4
95 8.6
100 6.3
105 4.5

To calculate the year’s minimum distribution amount, take the age of the retiree on Dec. 31 and find the corresponding distribution period. Then divide the value of the IRA by the distribution period to find the required minimum distribution.

Once they turn 70½, the IRS requires most retirement savers to withdraw a minimum amount of money — a required minimum distribution, or RMD — each year by Dec. 1 from their tax-deferred retirement accounts, including traditional IRAs and 401(k) plans.

For most seniors, RMDs are an expense and a hassle.

In 2009, when the IRS offered an RMD holiday in the aftermath of the economic meltdown, almost no one took a distribution, says Maura Cassidy, Fidelity Investment‘s director of retirement products.

“The average customer doesn’t need the distribution to live on,” Cassidy says. “Many of our customers just deposit it into a cash management or brokerage account.”

If you’re past that big birthday — and already dealing with RMDs — here are a few things to think about this year.

  • The penalties for ignoring an RMD are painful. If you don’t follow the rules, the IRS will penalize you by taking not only the amount required by the RMD, but also an excess accumulation tax, or 50 percent of the required distribution that you didn’t take. That’s more than just a slap on the wrist. Cassidy says Fidelity urges its retirement savings customers to set up an automatic withdrawal plan so your RMD doesn’t just slip your mind.
  • No more charitable donations in lieu of paying taxes. For several years, Congress allowed savers to make tax-free transfers from an IRA directly to a charity. Though this transaction didn’t provide any itemized deduction benefit, seniors met their required minimum distribution responsibilities and also avoided paying any tax on the money. The provision expired, and so far, Congress hasn’t done anything to revive it.
  • You can take the money from any account you want. If you have multiple tax-advantaged savings accounts, you’ll have to calculate the tax on all of them, but you can pull the money from wherever you want. “Take the RMD from the fund that isn’t performing all that well,” Cassidy suggests.
  • You can’t combine your RMD with your spouse’s. While it seems like it would make sense, the IRS doesn’t allow it. If both you and your spouse have tax-advantaged savings accounts and are required to make RMDs, the IRS requires you each calculate your own RMD. You can’t throw the requirements in a big pot and pay jointly.
  • You have to pay the bill with cash. Cassidy says that lots of people wait until the last minute and then they have to sell, sell, sell in a hurry to have enough cash on hand. Cassidy says Fidelity’s phones ring off the hook at the end of the year, and there are likely to be long waits on the phone for anyone who has put off until the last minute selling enough investments to pay their RMDs. Her advice: “Avoid the rush. Do it now.”

Here’s how to cope with paying an RMD on an IRA certificate of deposit.

 

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