Required Minimum Distributions: FAQs

All our lives, we are taught to save for the future. Required Minimum Distributions (RMDs) are your signal that the future has arrived. Really, it is a signal that Uncle Sam would like to collect his taxes. Nevertheless, many retirees find it a bit strange that they must withdraw from their retirement accounts whether they need the money or not.

Required Minimum Distributions are the source of many questions and a fair amount of confusion. Today’s article will clear up any confusion and show you just how easy it is to understand and calculate your RMDs.

1)  What types of accounts are subject to Required Minimum Distributions?

All tax-deferred retirement accounts are subject to RMDs. These include traditional and rollover IRAs, 401ks, 403bs, and 457 deferred comp plans. RMDs do not apply to regular taxable accounts such as trust accounts, individual accounts, or joint tenant.

2)  Do I need to take a Required Minimum Distribution from my ROTH IRA?

No. There are no RMDs from a ROTH IRA during your lifetime or that of your spouse, assuming he or she is your sole beneficiary. Most non-spousal beneficiaries will be required with withdraw all of the money in your IRA within 10 tax years, after your year of death.  There are exceptions to this for minor children, beneficiaries who are disabled or chronically ill (as defined by the IRS), or whose age is within 10 years of the account owner’s age.  beneficiary other than your spouse will be required to take an RMD starting the year after he or she inherits the account. The good news is the RMDs will be tax-free. Yay!

3)  At what age do I need to start taking Required Minimum Distributions?

You will need to start taking the required minimum distribution at 72 (as long as you did not turn 70 1/2 before 12/31/2019). Do not confuse the age at which you are required to take a minimum distribution (72) with the age at which you can take a distribution without penalty (59 ½).

Your RMD must be withdrawn by 12/31 each year. However, the IRS gives you an extra three months the first time you are required to take an RMD (until 4/1 of the following year).

Here’s the problem with that: Suppose you turn 72 in 2020, but you wait until 4/1/2021 to take your 2020 RMD. You would still have to take your 2021 RMD by 12/31/2021, so you end up taking two RMDs in the same calendar year. This could push you into a higher tax bracket. So I recommend withdrawing your RMD by 12/31 of the year you turn 72, and every year thereafter.

4)  Do I need to take a Required Minimum Distribution if I am still working?

Yes. You are required to take an RMD after age 72 from a traditional IRA. However, here are a couple of important points:

  • You are NOT required to take an RMD (even after age 72) from a company retirement plan such as a 401k or 403b if you are still working for that company and an active participant in the plan. You can also continue to contribute if you are working for the company and have earned income.
  • There are no RMDs for ROTH IRAs at any age.

5)  How do I calculate my Required Minimum Distributions?

Step 1 – Find out your IRA account balance as of the previous December 31.

Step 2 – Divide by the number from the Uniform Life Expectancy Table that corresponds with the age you will attain on your birthday in the current year.

Let’s look at an example: Suppose your account balance last 12/31 was $250,000 and you are going to be 72 on your birthday this year. You can see from the table below that the divisor that corresponds with your age is 25.6.

Required Minimum Distributions: FAQs

Therefore, $250,000 ÷ 25.6 = $9,766. You must withdraw this amount by 12/31 of this year.

One caveat to the above. You can use the Joint Life Expectancy table, which results in a smaller RMD, if your spouse is more than 10 years younger than you. There is also a different table, the Single Life Expectancy table for IRA beneficiaries that meet one of the exceptions to the 10 year distribution rule.

Now that you understand the math, here is an RMD Calculator to make things simple on yourself.

6)  What happens if I forget to take my Required Minimum Distributions?

There is a tax of 50% on the amount you were supposed to withdraw…assuming the IRS catches it. Alternatively, you can try explaining to the IRS that it was an honest error and reasonable steps are being taken to make up for the shortfall. The IRS almost always waives the penalty if you are forthcoming about your mistake and pay your taxes. You must file Form 5329 with a letter of explanation to request a waiver of penalty. Here are the instructions for Form 5329. You will only be taxed at your regular income tax rate if your waiver is approved.

7)  Can I reinvest my Required Minimum Distributions?

You cannot invest it back into an IRA unless you have earned income, in which case you could make an IRA contribution.  You can always invest your RMD funds in a regular taxable account.

8)  Do I need to take Required Minimum Distributions from each IRA if I have multiple accounts?

No. You can take all your RMDs from one account or any combination of IRA accounts. For example, suppose you have three IRA accounts and each one has a RMD of $10,000. You could take all $30,000 from one account, proportionally from all three accounts, or any combination that adds up to the required $30,000.

9)  Is there any way to avoid paying taxes on my Required Minimum Distributions?

Not really. RMDs are always taxable. Although…

  • You can donate the funds to charity, thereby eliminating the tax liability. This is called a Qualified Charitable Distribution (QCD), and the funds must be sent from your IRA custodian directly to the qualified charity.
  • Your RMD may only be partially taxable if you made a combination of pre-tax and after-tax contributions to your IRA. I hate after-tax IRA contributions for the reasons so eloquently explained in #7 of this blog post: IRA Contribution FAQs.

My most important piece of advice related to RMDs is…Have fun spending the money and treat yourself to something nice. ????

Have a great week and email us with any questions.