If you are close to retirement age, you probably have a lot of questions about required minimum distributions, or RMDs – and you’re not alone. The rules for RMDs can be confusing, and the penalties for making a mistake can be expensive.
Here, we’ve answered the most frequently asked questions about required minimum distributions. If you still have outstanding questions, our advisors are always available to help.
Disclosure: Before making any decisions about RMDs please consult with a financial professional.
What is a required minimum distribution (RMD)?
A required minimum distribution is a specific amount of money a retiree must withdraw annually from a tax-deferred retirement account after the age of 72.
What types of retirement plans require RMDs?
Required minimum distribution rules apply to all employer-sponsored retirement plans, including:
- 401(k)s
- 403(b)s
- 457(b)s
- Profit-Sharing Plans
As well as traditional IRAs plus IRA-based plans such as:
- SEPs
- SARSEPs
- SIMPLE IRAs
The rule also applies to Roth 401(k) accounts, but only once the owner has died.
When do you have to start taking required minimum distributions?
An IRA, SEP or SIMPLE owner must begin taking required minimum distributions (RMDs) for the year they turn age 72. It does not matter if they are still working or if they do not want to touch the money.
A non-spouse IRA beneficiary who inherited in 2020 or later must generally distribute the entire balance of their inherited account by the end of the tenth year after death. Certain non-spouse beneficiaries, such as disabled persons, chronically ill persons, minor children of the decedent, and beneficiaries who are not more than 10 years younger than the decedent can “stretch” distributions over their life expectancy, in which case distributions must begin to be made by the end of the year after death.
A spouse beneficiary (one who does not move the IRA funds into an IRA in their own name) generally does not have to start taking distributions until the deceased IRA owner would have been 72.
How is an RMD calculated?
To calculate your RMD, divide the year-end sum total of all your tax-deferred retirement accounts at the end of each year by the distribution period value that matches your age on December 31st each year. As your age increases, the required distributions get larger.
The IRS worksheet for calculating required minimum distributions can be found here.
What is the deadline for an IRA owner to take a required minimum distribution?
The deadline is usually December 31st of each year, but there is an exception for the year you turn 72. For the age 72 year, the RMD for that year can be delayed until April 1st of the next year (known as the required beginning date). All other RMDs are due by December 31st of that year.
If this is your first year taking an RMD, and delay it until April 1st, remember that you will have to take two RMDs in that calendar year – the first by April 1st and the second by December 31st.
Do you have to take a RMD from each account that you have?
Generally, yes – but there is an exception for traditional IRA accounts. You can calculate the distribution from each traditional IRA account and then combine the distributions from all like accounts and take the distribution from one or any combination of those like accounts.
Like accounts are all traditional IRA accounts (including SEP and SIMPLE IRAs) that are owned by the individual or all accounts inherited from the same person. Roth IRAs are considered their own separate category of IRA but are not subject to lifetime required distributions.
The same exception exists for 403(b) accounts.
Under no circumstances can you take a required minimum distribution for one type of retirement account from a different type of retirement account.
Can you take more than the required minimum distribution in a given year?
Yes, the RMD is simply a minimum amount. More can be taken out as desired. The only exception may be certain investments that limit withdrawals.
When are required minimum distributions taxed?
They are taxed in the year they leave the retirement account. If two RMDs are taken in the same year, they’ll both be taxed that year.
How are required minimum distributions taxed?
RMDs are taxed as ordinary income; there are no special federal tax breaks for taking an IRA RMD.
Certain states, however, offer partially exempt distributions from retirement accounts. Check with a local tax preparer to find out if there are any state tax breaks in your state.
What happens if you don’t take your RMD?
If an account owner fails to withdraw a RMD – or doesn’t withdraw it in the full amount – the amount not withdrawn is taxed at 50%, even if the mistake isn’t your fault. If you find yourself in this position, you should take the distribution as soon as you realize it was missed. The penalty is reported on IRS Form 5329 for the year of the missed distribution.
To get the penalty waived, you must take the missed distribution, file Form 5329 without the penalty payment and include a letter to the IRA requesting the waiver of the penalty for reasonable cause.
If you are 72+ during the year you’re moving employer plan assets to an IRA, does the plan have to pay out the RMD before the rest of the account can be moved?
The plan participant should take their required distribution before any assets in the plan are moved to an IRA or to another plan. All distributions from a plan that go to an IRA are rollovers – either 60-day rollovers or direct rollovers – and the required distributions cannot be rolled over.
The first funds out of the plan are considered to be the required distribution. If the required distribution is moved into the IRA, it is considered an excess contribution, and there are special rules that must be followed to correct an excess contribution. Individuals cannot just remove the amount of the required distribution to fix the problem.
If you will be 72 this year, but are still contributing to your 401(k), what required minimum distributions will you have to take this year?
You will have to take any RMD from any IRA that you have, and any plans of employers for which you no longer work. However, there is an exception to the RMD rules for employer plans, such as 401(k)s, if you are still working for the employer that sponsors that plan. If you are not more than a 5% owner of the company and if the plan allows, you can delay taking RMDs until you separate from service. Once separated from service, you will have a required distribution for the year of separation.
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