IRA Tips for Widows: Required Minimum Distribution
This week, we will be kicking off our series about the options widows have when their husbands pass away and leave them IRA accounts, or workplace retirement plans like 401(k)s and 403(b)s.
The death of a spouse is always a difficult time for a surviving widow, but there are considerations that need to be made regarding IRA accounts and workplace retirement plans. While you may still be grieving after losing your spouse, you need to realize that these decisions can’t wait forever, and you need to be prepared to act, or you may be stuck with tax consequences that could affect your ability to have a comfortable retirement. It may even be a good idea to learn about the decisions you will have to make while you and your spouse are both still alive. That way, when the worst happens, you will know exactly what you need to do to get your financial house in order.
As part of a continuing series on IRA tips for widows, Retirement Media will be discussing the options available to surviving spouses who need to take distributions from an inherited IRA or workplace retirement plan. Although this series is focused on women, you should know that these tips also apply to male surviving spouses. This week, we will be discussing Required Minimum Distributions, or RMDs, one of the most basic things you will need to know when doing your IRA planning. As the series goes on, we will be getting into more and more detailed information. By the time you finish reading the entire series, you will be able to do IRA planning in your sleep! So let’s get started.
Required Minimum Distributions
The first concept you will need to understand with any IRA, including one you inherit from your spouse, is the Required Minimum Distribution (RMD). This is the amount the IRS requires you to withdraw from your Traditional IRA beginning six months after your 70th birthday. The amount you will have to take out is based on the amount of money in your account, divided by your life expectancy. You can find a great RMD calculator here, and determine what your RMD will be.
Traditional IRAs are tax-deferred accounts, meaning that you put off paying taxes on any money held in an IRA until the time you withdraw it. The money you withdraw will be included in your taxable income, and you will have to pay taxes on it at the current income tax rate. If you decide you don’t want to take an RMD, the penalties are pretty steep.
If you take no RMD at all, you will be penalized 50% of the amount you were supposed to take. If you don’t take a large enough RMD (again, you can use the RMD calculator to find out how much you will need to withdraw), you will be penalized 50% of the remainder of the RMD you were supposed to take. So if your RMD was $10,000 and you only took out $5,000, you will have to hand over $2,500 to the IRS. You should also know that although many financial institutions will calculate your RMD and may even withdraw it for you, it’s up to you to ensure they take out the right amount. If the bank makes a mistake, you will still be the one paying the tax bill, so make sure to check their arithmetic.
And as far as taxes go, even a Required Distribution is considered a withdrawal, so you will have to pay taxes on your RMDs as well. One thing people often don’t know about RMDs is that the IRS can make you take one even if you’re dead! More accurately, if you die and pass your IRA along to your spouse, they will be responsible for taking an RMD as if you were still alive. As a surviving spouse, it’s important to know when you will have to take an RMD from your inherited IRA, and the options you have in that situation. We will be going into greater detail on that subject later in the series.
Another point you should know is that if you happened to have inherited a Roth IRA, you won’t have to worry about taking an RMD.. The great thing about Roth IRAs is that they contain after-tax money (meaning that you have already paid taxes on it) and thus you will never be required to take an RMD. There are some special rules that apply to Roth IRAs, but we will get into that later in the series. For now, all you need to know is that you will not have to take an RMD from a Roth IRA.
So now that you understand the concept of RMDs, you will be equipped to move into the more advanced information about what to do when you inherit an IRA from your spouse. Next week we will be discussing the options a surviving spouse has when taking distributions from an inherited IRA, and the factors that can affect the timing of RMDs from inherited accounts.