When Is a Required Minimum Distribution Required?
Properly managing your retirement savings means knowing the rules for Required Minimum Distributions. Learn how these regulations apply to your specific situation.
A Required Minimum Distribution, or RMD, is a mandatory withdrawal individuals must take from certain retirement accounts. The purpose of these rules is to ensure that tax-deferred funds are eventually distributed and become subject to income tax. RMD rules compel the distribution of these funds during an individual’s lifetime, preventing them from being held indefinitely for estate planning and ensuring the government collects its tax revenue.
Determining Your RMD Starting Age
The age you must begin taking RMDs depends on your birth year, as established by the SECURE Act and its successor, SECURE 2.0. The age is 73 for those born between 1951 and 1959. For individuals born in 1960 or later, the starting age increases to 75.
The “still working” rule is an exception that allows an individual to delay RMDs from their current employer’s retirement plan, such as a 401(k), as long as they are still employed. This exception does not apply to IRAs or retirement plans from previous employers. To qualify, the plan must permit the delay, and the individual cannot be a 5% or more owner of the business.
The deadline for taking your first RMD is April 1 of the year after you reach your RMD age. For every subsequent year, the deadline is December 31. While delaying the first RMD is an option, it results in taking two distributions in a single calendar year—the first-year RMD and the current-year RMD. This could increase your taxable income and potentially push you into a higher tax bracket.
Accounts Subject to RMDs
RMD rules apply to retirement accounts funded with pre-tax dollars, allowing contributions and earnings to grow tax-deferred. The most common accounts subject to these rules include Traditional IRAs, SEP IRAs, and SIMPLE IRAs. Employer-sponsored plans such as traditional 401(k)s, 403(b)s, and governmental 457(b) plans also fall under these regulations.
Roth IRAs are not subject to RMDs for the original account owner. Designated Roth accounts within employer-sponsored plans, like Roth 401(k)s, are also exempt for the original owner. This exemption exists because contributions to Roth accounts are made with after-tax dollars, allowing the funds to continue growing tax-free for the owner’s entire life without a mandatory withdrawal.
RMD Rules for Inherited Accounts
Rules for beneficiaries depend on their relationship to the original owner. A surviving spouse has the most flexibility and can treat an inherited IRA as their own by rolling it into their personal IRA. This allows them to follow RMD rules based on their own age. Alternatively, a spouse can remain a beneficiary of the account and take RMDs based on the deceased spouse’s age.
A category known as Eligible Designated Beneficiaries (EDBs) includes minor children of the original owner, individuals who are disabled or chronically ill, and beneficiaries who are not more than 10 years younger than the decedent. EDBs are permitted to take distributions over their own life expectancy, a method known as a “stretch” provision. This allows the funds to be distributed more slowly, extending tax-deferred growth.
Most other non-spouse beneficiaries, like adult children, are subject to a 10-year rule for accounts inherited after December 31, 2019. This rule requires the entire account balance to be withdrawn by the end of the 10th year after the owner’s death. A distinction applies within this rule. If the owner died on or after their RMD start date, the beneficiary must take annual distributions during the 10-year period. If the owner died before their RMD start date, no annual distributions are required, but the account must still be emptied by the 10-year deadline.
Calculating and Taking Your Distribution
To calculate your RMD, take the fair market value of your account as of December 31 of the previous year and divide it by the distribution period factor from the IRS’s Uniform Lifetime Table. This factor corresponds to your age for the current year. For example, if your IRA balance was $500,000 and the factor for your age is 25.5, your required withdrawal would be calculated by dividing the balance by that number.
Once the amount is calculated, you can take the distribution in several ways. You can request a one-time withdrawal or arrange for automatic distributions to be sent monthly, quarterly, or annually.
If you have multiple retirement accounts, the RMD must be calculated separately for each. However, you are permitted to aggregate the total RMD amount from all your IRAs and take that total sum from just one of the IRA accounts. This aggregation rule does not extend to 401(k) or 403(b) plans; RMDs from those plans must be taken from each respective plan.
Penalties for Missed RMDs
Failing to take your full RMD by the annual deadline results in a 25% excise tax on the amount that was not withdrawn. This penalty can be reduced to 10% if the mistake is corrected in a timely manner. A correction involves withdrawing the RMD shortfall and filing the appropriate tax form. You can also request a waiver of the penalty if you can demonstrate to the IRS that the failure was due to a reasonable error and that you are taking steps to remedy the situation.
To address a missed RMD and request a penalty waiver, you must file IRS Form 5329. On this form, you report the shortfall and can attach a letter of explanation for the error.