Understanding Required Minimum Distribution (RMD) Rules

Required Minimum Distributions (RMDs) have been around for many years.  Over the past few years, updates have been made via Secure Act 1.0 and Secure Act 2.0 so we wanted to provide a reminder and update on how the current rule works. 

People who have a tax-deferred retirement account such as an IRA, Simple IRA, SEP IRA, or 401(k) plan are currently required to begin taking an annual distribution from these accounts at the age of 73.  These required distributions are taxable in the year they are taken.  The amount of the required minimum distribution, or RMD is based on:

· Your account value on December 31st of the year prior to the required distribution; and

· Your life expectancy as determined by the IRS and the relevant calculation table

While taxpayers can always distribute more than the IRS determined RMD, many people prefer leveraging the tax-deferred element of their tax deferred accounts for as long as possible.  Therefore, many simply take the minimum amount out each year and use other sources of income like Social Security, pensions and personal investment accounts to cover their living expenses.

Here are common questions we receive from clients regarding Required Minimum Distributions:

When is my first RMD due?

Currently, your first RMD is due for the year you turn 73.  The RMD age is slated to increase to 75 starting in 2033.  Regarding the timing of the first RMD, it must be completed by April 1 of the year following the year you turn 73.  All subsequent RMDs are due by year end.    

Are there reasons to withdraw more than the RMD from my tax deferred account?

There are times in which it is appropriate to withdraw more than the minimum amount.  One example would include those times when a taxpayer knows that their tax rate in the next year will be higher than the current year (through the sell of a business, etc.)

Who calculates the amount of the RMD?

Most IRA custodians, or retirement plan administrators will calculate the RMD.  However, it is ultimately the taxpayer’s responsibility for calculating and initiating the withdrawal.  Beacon manages this process for clients.

About how much will my RMD be?

The actual amount of your distribution is dependent on the value of your account and your age.  However, as a general guideline, for those age 73 and using the uniform lifetime IRS table, the calculated RMD will equate to about 3.77% of your account value.  This percentage will increase to about 4.95% at age 80 and 8.20% at age 90.

Are taxes required to be withheld from RMDs?

Although there is no requirement that taxes be withheld from the distribution, many prefer having taxes withheld.  Make sure to track if you have any post tax contributions included in the retirement plan as you don’t want to be taxed twice.

What happens if a person does not take a RMD by the deadline?

The penalty has been reduced to 25% (from 50%) for any amount required, but not withdrawn from an account.  This amount can be further reduced to 10% if corrected in a timely manner.

When I pass away will my IRA beneficiaries be required to continue taking RMDs?

In most circumstances the answer is yes.  The amount of the RMD for beneficiaries inheriting an IRA is dependent on the year of death of the owner, the relationship to the deceased and other special considerations.  For example, spousal beneficiaries can choose to transfer their deceased spouse’s IRA into their own name and take RMDs according to their own life expectancy. 

Are RMDs required from Roth accounts?

RMDs are currently not required to be taken from Roth accounts.  However, beneficiaries of Roth accounts are often required to complete RMDs according to the schedule applicable to them and their relationship to you.

Do I need to take RMDs if I am still working?

For IRAs - yes.  For participants in employer-sponsored retirement plans, they can delay taking their RMDs from their current employer plan until they retire, unless they are a 5% owner of the business sponsoring the plan.

Can I take all my RMDs from one account?

For IRAs, you must calculate the RMD separately for each IRA but can withdraw the total amount from one or more of the IRAs. For other types of retirement plans, such as 401(k) and 457(b) plans, you must take the RMD separately from each of those plan accounts.