Required minimum distributions, often referred to as RMDs or minimum required distributions, are amounts that the federal government requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans after you reach age 73 (if you attain age 70 1/2 after 2019) or, in some cases, after you retire. You can always withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal penalty.
The RMD rules are designed to spread out the distribution of your entire interest in an IRA or plan account over your lifetime. The purpose of the RMD rules is to ensure that people don’t just accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. Instead, RMDs generally have the effect of producing taxable income during your lifetime.
WHICH RETIREMENT SAVINGS VEHICLES ARE SUBJECT TO THE RMD RULES?
In addition to traditional IRAs, Savings Incentive Match Plan IRAs and Simplified Employee Pension IRAs are subject to the RMD rules. Roth IRAs, however, are not subject to these rules while you are alive. Although you are not required to take any distributions from your Roth IRAs during your lifetime, your beneficiary will generally be required to take distributions from the Roth IRA after your death.
Employer-sponsored retirement plans that are subject to the RMD rules include qualified pension plans, qualified stock bonus plans and qualified profit-sharing plans, including 401(k) plans. Section 457(b) plans and Section 403(b) plans are also subject to these rules. If you are uncertain whether the RMD rules apply to your employer-sponsored plan, you should consult your plan administrator or a tax professional.
WHEN MUST RMDs BE TAKEN?
Your first required distribution from an IRA or retirement plan is for the year you reach age 73 (if you attain age 70 1/2 after 2019). However, you have some flexibility as to when you actually have to take this first-year distribution. You can take it during the year you reach age 73 (if you attain age 70 1/2 after 2019), or you can delay it until April 1 of the following year.
Note: If you reach age 73 before July 1, 2023, you will need to take an RMD by December 31, 2023.
Since this first distribution generally must be taken no later than April 1 following the year you reach age 73 (if you attain age 70 1/2 after 2019), this April 1 date is known as your required beginning date. Required distributions for subsequent years must be taken no later than December 31 of each calendar year until you die, or your balance is reduced to zero. This means that if you opt to delay your first distribution until April 1 of the following year, you will be required to take two distributions during that year – your first year’s required distribution and your second year’s required distribution.
HOW ARE RMDS CALCULATED?
RMDs are calculated by dividing your traditional IRA or retirement plan account balance by a life expectancy factor found in Publication 590-B (most IRA owners will use the Uniform Life Table). Your account balance is calculated as of December 31 of the preceding year for which the distribution is required to be made.
For most taxpayers, calculating RMDs is straightforward. For each calendar year, simply divide your account balance as of December 31 of the prior year by your distribution period, determined under the Uniform Lifetime Table using your attained age in that calendar year. This life expectancy table is based on the assumption that you have designated a beneficiary who is exactly 10 years younger than you are. Every IRA owner’s and plan participant’s calculation is based on the same assumption.
There is one exception to the procedure described above. If your sole designated beneficiary is your spouse, and they are more than 10 years younger than you, the calculation of your RMDs may be based on the longer joint and survivor life expectancy of you and your spouse. (These life expectancy factors can be found in IRS Publication 590.) Consequently, if your spouse is your designated beneficiary and is more than 10 years younger than you, you can take your RMDs over a longer payout period than under the Uniform Lifetime Table. If your beneficiary is a non-spouse or a spouse who is not more than 10 years younger than you, you are subject to the shorter payout period under the simplified general rule.
If you have multiple IRAs, an RMD is calculated separately for each IRA. However, you can withdraw the required amount from any one or more IRAs. Inherited IRAs are not included with your own for this purpose. (Similar rules apply to Section
403(b) accounts.) If you participate in more than one employer retirement plan, your RMD is calculated separately for each plan and must be paid from that plan.
SHOULD I DELAY TAKING MY FIRST RMD?
Your first decision is when to take your first RMD. Remember, you have the option of delaying your first distribution until April 1 following the calendar year in which you reach age 73 (or April 1 following the calendar year in which you retire, in some cases).
You might delay taking your first distribution if you expect to be in a lower income tax bracket in the following year, perhaps because you’re no longer working or will have less income from other sources. However, if you wait until the following year to take your first distribution, your second distribution must be made on or by December 31 of that same year.
Receiving your first and second RMDs in the same year may not be in your best interest. Since this “double” distribution will increase your taxable income for the year, it will probably cause you to pay more in federal and state income taxes. It could even push you into a higher federal income tax bracket for the year. In addition, the increased income may cause you to lose the benefit of certain tax exemptions and deductions that might otherwise be available to you. So the decision of whether to delay your first required distribution can be important, and should be based on your personal tax situation.
WHAT IF I FAIL TO TAKE RMDs AS REQUIRED?
You can always withdraw more than you are required to from your IRAs and retirement plans. However, if you fail to take at least the RMD for any year (or if you take it too late), you will be subject to a federal penalty. The penalty is a 25% excise tax on the amount by which the RMD exceeds the distributions actually made to you during the taxable year. For IRAs, the tax is further reduced to 10% if corrected.
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