Required Minimum Distributions (RMDs) are the minimum amounts you must withdraw from certain retirement accounts each year. Failing to take them can result in significant penalties. This guide breaks down everything you need to know about What Is Required Minimum Distribution, including eligibility, deadlines, calculation, and more.
Who Needs to Take RMDs?
Generally, you must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, 401(k), 403(b), and other retirement plan accounts when you reach age 73. This age was increased from 70 ½ to 72 and now to 73 due to the SECURE Act and SECURE 2.0 Act.
Participants in a workplace retirement plan (for example, 401(k) or profit-sharing plan) can often delay taking their RMDs until the year they retire, unless they are a 5% owner of the business sponsoring the plan.
Key Exceptions:
- Roth IRAs: Withdrawals from Roth IRAs are not required during the account owner’s lifetime. However, beneficiaries of Roth IRAs are subject to RMD rules after the owner’s death.
- Designated Roth Accounts (401(k) or 403(b)): Similar to Roth IRAs, RMDs are not required from designated Roth accounts while the owner is alive. Beneficiaries, however, are subject to RMD rules.
RMD Deadlines: When Do I Need to Take My First Distribution?
If you reach age 73 in 2024:
- Your first RMD is due by April 1, 2025, based on your account balance on December 31, 2023.
- Your second RMD is due by December 31, 2025, based on your account balance on December 31, 2024.
Essentially, you get a grace period for your first RMD, extending the deadline to April 1st of the following year. However, taking it then means you’ll also need to take your second RMD by December 31st of the same year, potentially increasing your tax burden.
How to Calculate Your Required Minimum Distribution
The RMD is calculated for each account separately. The formula is:
RMD = Prior December 31st Account Balance / Life Expectancy Factor
The IRS publishes life expectancy factors in tables found in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Which table you use depends on your specific situation:
- Uniform Lifetime Table III: Use this table if your spouse is not your sole beneficiary or your spouse is not more than 10 years younger than you. This is the most common table.
- Joint and Last Survivor Table II: Use this table if the sole beneficiary of the account is your spouse, and your spouse is more than 10 years younger than you.
- Single Life Expectancy Table I: Use this if you are a beneficiary of an inherited IRA.
While your IRA custodian or retirement plan administrator may calculate the RMD, the ultimate responsibility for taking the correct amount lies with the account owner.
Can I Withdraw More Than the RMD?
Yes, you can withdraw more than the minimum required amount. However, any amount withdrawn beyond the RMD does not count towards future RMD requirements.
What Happens If I Don’t Take My RMD?
Failing to withdraw the full amount of your RMD by the deadline can result in a hefty penalty. The amount not withdrawn may be subject to an excise tax of 25%, reduced to 10% if the RMD is timely corrected within two years. You’ll need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts with your federal tax return for the year the RMD was missed.
Waiver of Penalty:
The IRS may waive the penalty if you can demonstrate that the shortfall was due to reasonable error and that you are taking reasonable steps to correct it. You’ll need to file Form 5329 and attach a letter explaining the situation.
Taxation of RMDs
RMDs are generally taxed as ordinary income in the year they are withdrawn. The exception is if the RMD represents a return of basis (contributions that were already taxed) or is a qualified distribution from a Roth IRA, in which case it is tax-free.
Can RMDs Be Rolled Over?
No, RMD amounts cannot be rolled over into another tax-deferred account. Once withdrawn as an RMD, the funds are considered a distribution and are subject to income tax (unless from a Roth account).
Special Rule: The 10-Year Rule for Inherited Accounts
For defined contribution plan participants or IRA owners who die after December 31, 2019, the SECURE Act introduced a “10-year rule” for beneficiaries (with a delayed effective date for certain collectively bargained plans). This means the entire balance of the deceased participant’s account must be distributed within ten years of the owner’s death.
Exceptions to the 10-Year Rule:
The 10-year rule does not apply to:
- A surviving spouse
- A child who has not reached the age of majority
- A disabled or chronically ill person
- A person not more than ten years younger than the employee or IRA account owner
These “eligible designated beneficiaries” can generally take distributions over their life expectancy.
RMDs and Pre-1987 403(b) Contributions
If your 403(b) plan includes contributions made before 1987 and the plan has kept separate records of these amounts, a special rule may apply. The pre-1987 amounts (excluding earnings) may not be subject to the standard age 73 RMD rules. Instead, they may not need to be distributed until December 31 of the year you turn 75 or, if later, April 1 of the year following the year you retire. Consult your plan administrator for details.
Staying Compliant with RMD Rules
Understanding what is required minimum distribution is crucial for avoiding penalties and managing your retirement income effectively. Keep accurate records, consult with a financial advisor, and stay informed about any changes to IRS regulations. By taking the necessary steps, you can ensure you meet your RMD obligations and enjoy a financially secure retirement.
