What to Know About Required Minimum Distributions (RMDs)
Effectively manage the mandatory withdrawal phase of your retirement plan. This guide explains the process for meeting tax obligations on your savings.
A Required Minimum Distribution (RMD) is the amount the federal government mandates you withdraw each year from specific tax-deferred retirement accounts once you reach a certain age. The purpose of RMDs is to ensure that funds growing in a tax-deferred environment are eventually distributed and become subject to income tax, preventing these accounts from being used as indefinite tax shelters.
Determining Your RMD Obligation
RMD rules apply to most tax-deferred retirement accounts, but not to Roth IRAs for the original owner. Accounts subject to RMDs include:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
The SECURE 2.0 Act adjusted the starting age for RMDs based on your birth year. If you were born between 1951 and 1959, your RMDs begin at age 73. For those born in 1960 or later, the starting age is 75.
An exception exists for those who continue working past the RMD age. The “still-working exception” allows you to delay RMDs from your current employer’s plan, such as a 401(k), if you do not own more than 5% of the company. This delay does not apply to IRAs or to plans from previous employers, which still require RMDs on schedule.
Calculating the RMD Amount
To calculate your RMD, divide your account balance from December 31 of the previous year by a life expectancy factor from the IRS. You can find the prior year-end balance on your account statement.
The life expectancy factor is found in IRS Publication 590-B, which contains three tables. Most account holders use the Uniform Lifetime Table. This table is for unmarried owners, married owners whose spouse is not more than 10 years younger, or those whose spouse is not their sole beneficiary.
The Joint and Last Survivor Table is used if your spouse is your sole beneficiary and is more than 10 years younger, resulting in a smaller RMD. The third table, the Single Life Table, is for beneficiaries of inherited accounts. For example, a 75-year-old with a $200,000 account balance would use the Uniform Lifetime Table factor of 24.6, resulting in an RMD of $8,130.08.
Taking the Distribution and Tax Reporting
The annual deadline for taking your RMD is December 31. A special rule allows you to delay your first RMD until April 1 of the year after you reach your RMD start age. If you choose this option, you must take two distributions in that year, which could lead to a higher tax liability.
Contact your financial institution to request the withdrawal. While you must calculate the RMD for each of your Traditional, SEP, and SIMPLE IRAs separately, you can aggregate the total and withdraw it from any one or combination of those IRAs. This aggregation rule does not apply to 401(k)s; their RMDs must be calculated and withdrawn from each plan individually.
Your RMD is taxed as ordinary income in the year you receive it. Your financial institution will send Form 1099-R, which reports the distribution to you and the IRS. You will use this form to report the income on your tax return.
Consequences of a Missed RMD
Failing to take your full RMD results in an IRS penalty. Under the SECURE 2.0 Act, the penalty is an excise tax of 25% of the amount that was not withdrawn.
The penalty can be reduced to 10% if you withdraw the shortfall and file Form 5329 within a two-year correction window. This form is filed with your tax return to report the shortfall and calculate the penalty owed.
You may also request a penalty waiver on Form 5329. The IRS may waive the penalty if you can show the failure was due to a reasonable error and you are taking steps to correct it. This requires attaching a letter of explanation to the form.
Rules for Inherited Retirement Accounts
Rules for inherited retirement accounts depend on the beneficiary’s relationship to the deceased. The SECURE Act created beneficiary categories with different withdrawal requirements. These rules apply to both inherited traditional and Roth IRAs, as beneficiaries of Roth IRAs do have distribution requirements.
Eligible Designated Beneficiaries (EDBs) have the most flexible options. This group includes:
- The surviving spouse
- Minor children of the account owner
- Disabled or chronically ill individuals
- Beneficiaries not more than 10 years younger than the decedent
A surviving spouse can roll the inherited IRA into their own, while other EDBs can often take distributions over their own life expectancy.
Most other individual beneficiaries, like adult children, are Non-Eligible Designated Beneficiaries and are subject to the 10-year rule. This rule requires the entire account balance to be withdrawn by the end of the 10th year after the owner’s death. If the owner died after their RMDs began, the beneficiary must also take annual RMDs during years one through nine. The IRS has waived penalties for these missed annual distributions for 2021 through 2024 due to confusion over the rule.
The third category, non-designated beneficiaries, includes entities like an estate or a charity. If the account owner died before their RMDs began, the beneficiary must withdraw the entire account balance within five years of the owner’s death.