How Is a Required Minimum Distribution Determined?

A Required Minimum Distribution, or RMD, is a mandatory annual withdrawal from certain retirement accounts. The federal government requires these distributions to ensure that individuals eventually pay income tax on funds held within tax-deferred retirement plans, preventing them from being used to indefinitely avoid taxes. Failing to withdraw the required amount can lead to significant penalties. The IRS can impose an excise tax on the shortfall of up to 25%, which can be reduced to 10% if the error is corrected in a timely manner.

Information Needed to Determine Your RMD

To determine your RMD, you first need to identify which of your accounts are subject to these rules. RMDs apply to tax-deferred retirement plans such as Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and 403(b)s. A Roth IRA does not require distributions for the original account owner, but beneficiaries of Roth IRAs are subject to RMD rules.

Another piece of information is the account’s fair market value as of December 31 of the preceding year. This value, found on your year-end account statement, serves as the basis for the current year’s RMD calculation.

The final component is a “life expectancy factor” provided by the IRS in Publication 590-B. The correct table depends on your circumstances. Most account owners use the Uniform Lifetime Table. However, if your spouse is your sole beneficiary and is more than 10 years younger than you, you will use the Joint Life and Last Survivor Expectancy Table, which results in a smaller RMD.

The Standard RMD Calculation

The RMD formula involves dividing the account balance from the previous year-end by the life expectancy factor for the current year. This calculation provides the minimum amount you are required to withdraw for that tax year.

For example, consider a 75-year-old individual with a Traditional IRA valued at $500,000 on December 31 of last year. To find their RMD, they would consult the IRS Uniform Lifetime Table, where the life expectancy factor for age 75 is 24.6.

The calculation would be: $500,000 divided by 24.6, which equals an RMD of $20,325.20 for the year. This is the minimum amount that must be withdrawn from the account by the annual December 31 deadline. You are always permitted to withdraw more than the calculated RMD.

Rules for Multiple Retirement Accounts

When you own multiple retirement accounts, the rules for combining withdrawals differ by account type. There is a clear separation between how IRAs and employer-sponsored plans like 401(k)s are treated.

For individuals with several IRAs, including Traditional, SEP, and SIMPLE IRAs, you must calculate the RMD for each IRA separately. After determining the RMD for each account, you can add these amounts together to get a total RMD. This combined total can then be withdrawn from any single IRA or any combination of your IRAs.

The rules for employer-sponsored plans, such as 401(k)s and 457(b)s, are more rigid. An RMD must be calculated for each of these plans individually, and you must withdraw that specific RMD amount directly from the plan for which it was calculated. You cannot aggregate the RMDs from different 401(k) plans, nor can you satisfy a 401(k) RMD by taking a larger distribution from an IRA. An exception exists for 403(b) plans, which, similar to IRAs, allow for aggregation among other 403(b) accounts.

Determining RMDs for Inherited Accounts

The rules for RMDs from inherited retirement accounts depend on the beneficiary’s relationship to the original owner. These regulations were altered by the SECURE Act, creating different paths for spousal and non-spousal beneficiaries.

Spouse Beneficiaries

A surviving spouse who is the sole beneficiary of a retirement account has flexible options. One choice is to treat the inherited IRA as their own by rolling the assets into their personal IRA. This allows the surviving spouse to delay taking RMDs until they reach their own RMD age and then use the Uniform Lifetime Table. Alternatively, the spouse can treat the account as an inherited IRA and delay distributions until the year the deceased owner would have reached RMD age, or begin taking distributions based on their own life expectancy using the Single Life Expectancy Table.

Non-Spouse Beneficiaries

For most non-spouse beneficiaries, the SECURE Act established the “10-year rule” for accounts inherited after December 31, 2019. This rule requires the entire balance of the inherited account to be withdrawn by the end of the 10th year following the owner’s death. Recent IRS guidance clarified that if the original owner died after their required beginning date for RMDs, the beneficiary must take annual distributions in years one through nine, in addition to emptying the account by year 10.

The law provides an exception for “Eligible Designated Beneficiaries” (EDBs). This group includes the deceased owner’s minor children, individuals who are disabled or chronically ill, and beneficiaries who are not more than 10 years younger than the original owner. EDBs are not subject to the 10-year rule and can instead take distributions over their own life expectancy. For a minor child, this treatment lasts only until they reach the age of 21, at which point the 10-year rule begins.