Written By: Cynthia Levine, CFP, CPA, EA

If you turned 70 this year, then congratulations are in order! Firstly, making it to 70 indicates the luck of longevity. Secondly, you have witnessed the birth of rock ‘n roll, men walking on the moon, the Internet age, and the fall of the Berlin Wall. Thirdly—and most excitedly—if you reach 70 ½ by December 31st of this year, then you are required to begin RMDs.

What are RMDs? You may be hoping that RMDs stand for Raspberry Martini Drinks but, in fact, RMDs stand for Required Minimum Distributions from retirement plan accounts. Retirement plans come in many flavors, including Individual Retirement Accounts (SIMPLE, SEP or traditional) and work place retirement accounts such as 401(k) and 403(b) plans.

What is the point behind RMDs? Uncle Sam encourages workers to save for their future retirement by allowing them to put aside untaxed earnings into their retirement plans. But, Uncle Sam does not allow these accounts to grow tax-free indefinitely and, at age 70 ½, owners of retirement accounts must begin annual distributions that are taxed as ordinary income.

Why 70 ½? Who knows!?! But, as my father was fond of saying, “Them’s the rules.”

How is your RMD calculated?  In general, you take your December 31st prior-year retirement account balance (or balances) and divide it by your life expectancy factor from the Uniform Lifetime Table (ULT). Careful—there are exceptions to using the ULT. If you are looking for “keep you on the edge of your seat” reading, then consult IRS publication 590-B to better understand the RMD rules. But, we strongly recommend you take a far simpler route and consult with your financial strategist or tax advisor.

What happens if you choose to ignore the rules and decide not to take your RMD? That is not a good idea since the tax penalty is steep at 50% of the undistributed RMD. If you are turning 70 ½ in the current year, you do have a small reprieve on your first RMD. You may delay taking it until April 1st of next year. But, be careful. Delaying it means a double-whammy from a tax perspective. That is, you’ll be taxed on your current year and next year RMD in a single tax year.

Are there exceptions to the RMD rule? There are no exceptions for Individual Retirement Accounts; however, there are no Required Minimum Distributions associated with a ROTH Individual Retirement Account. ROTH accounts may grow tax-free until the owner’s death but the rules change for those who inherit a ROTH IRA.

Still working past 70 ½? You may delay taking RMDs from your current employer’s retirement plan if you are less than a 5% owner in the company and your plan allows you to delay taking RMDs. But, you must take RMDs from any prior employer retirement plans holding assets. Employer retirement plans include SIMPLE and SEP IRAs as well as 401(k) and 403(b) plans.

Any interesting twists? If your current employer’s retirement plan allows you to rollover your prior employer retirement plans and/or IRA accounts to your current retirement plan, then you may avoid taking RMDs until you retire—even if you are older than 70 ½.

Bottom line? If you are turning 70 ½ this year, celebrate your longevity with a Raspberry Martini Drink and then consult with your financial strategist about your RMD.