What Is a Mandatory Distribution from a Retirement Plan?
Tax-deferred retirement accounts are subject to mandatory withdrawals. Understand the framework for these distributions and the process for ensuring compliance.
A mandatory distribution from a retirement plan, known as a Required Minimum Distribution (RMD), is a withdrawal you must take from certain retirement accounts once you reach a specific age. These rules exist because the accounts are tax-deferred, meaning you did not pay taxes on the contributions or their earnings. The government mandates these withdrawals to ensure it eventually receives tax revenue from the funds.
These distributions are considered taxable income for the year in which they are withdrawn. While you must take out a calculated minimum, you are always permitted to withdraw more.
Determining Your RMD Requirement
The age to begin taking RMDs was increased by the SECURE 2.0 Act of 2022. If you were born between 1951 and 1959, you must begin taking RMDs at age 73. For those born in 1960 or later, the starting age is also 73, but this is scheduled to increase to 75 in 2033.
The RMD rules apply to most tax-deferred retirement accounts, including Traditional, SEP, and SIMPLE IRAs. Employer-sponsored plans such as 401(k)s, 403(b)s, and 457(b) plans are also subject to these mandatory withdrawal rules.
Some accounts have exceptions to the RMD rules. The original owner of a Roth IRA is not required to take distributions during their lifetime, and this exemption also applies to designated Roth accounts within employer plans like 401(k)s. Another exception is the “still-working” rule, which allows you to delay RMDs from your current employer’s 401(k) or other qualified plan if you are still employed past the RMD starting age. This does not apply to IRAs or to individuals who own more than 5% of the business sponsoring the plan.
Calculating the Required Amount
To calculate your RMD, you must divide your retirement account’s balance as of December 31 of the preceding year by a life expectancy factor from the IRS. This calculation must be performed annually. The primary table used is the IRS’s Uniform Lifetime Table, which provides a life expectancy factor for each age. For example, a 75-year-old has a factor of 24.6, so a $500,000 account balance would result in an RMD of approximately $20,325 for that year.
If you have multiple Traditional, SEP, or SIMPLE IRAs, you must calculate the RMD for each one separately but can withdraw the total combined amount from any one or more of them. This aggregation rule does not apply to 401(k) and 457(b) plans, which require RMDs to be taken from each plan individually. For 403(b) plans, you can total the RMDs from all your accounts and take the full amount from just one or more of them.
Consequences of a Missed Distribution
Failing to take your full RMD by the December 31 deadline results in a penalty. The SECURE 2.0 Act set this penalty as an excise tax of 25% of the RMD shortfall, a reduction from the previous 50%.
The penalty can be reduced to 10% if you correct the shortfall within a defined “correction window,” which extends to the end of the second year after the RMD was missed. This penalty is in addition to the regular income tax you will owe on the distribution once it is taken.
The IRS can waive the penalty if you demonstrate that the failure to take the RMD was due to a reasonable error. This requires filing a specific form and providing a satisfactory explanation for the oversight.
Correcting a Missed Distribution
If you miss an RMD, the first step is to withdraw the entire shortfall amount from your retirement account as soon as the error is discovered. Taking this corrective distribution is a prerequisite for seeking relief from any penalties.
Next, you must request a waiver by filing IRS Form 5329 for the tax year in which the RMD was missed. You do not need to pay the penalty when filing the form and requesting a waiver. Payment is only required if the IRS denies your request and sends a notice demanding it.
On Form 5329, you report the required and actual RMD amounts. To request a waiver, enter zero for the tax due and write “RC” (Reasonable Cause) and the shortfall amount on the appropriate line. You must also attach a letter to your tax return explaining why you missed the distribution.
The IRS evaluates waiver requests on a case-by-case basis. A “reasonable cause” could include a serious illness, a death in the family, or a documented error by your financial institution. A clear explanation of the circumstances is necessary for the IRS to consider waiving the penalty.