A critical aspect of retirement planning is understanding the rules and requirements surrounding Required Minimum Distributions (RMDs) from retirement savings accounts. An RMD is a mandatory minimum amount that retirement account owners must withdraw from their accounts annually.
This article overviews RMD requirements and how to circumvent IRS penalties by not exercising them.
What accounts have RMDs?
RMDs are the minimum amount the IRS requires to be withdrawn from a tax-deferred retirement plan. The amount withdrawn is taxed as ordinary income at the owner’s tax rate. RMDs apply to:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- Rollover IRAs
- 401(k) and 403(b) plans
- Most small business accounts
It’s essential to note that Roth IRAs, Roth 401(k)s, and Roth 403(b)s do not have RMDs.
Changing RMD ages
In the past, RMDs commenced at 70 1/2 unless one solely owned a 5% or more interest in the business sponsoring the retirement plan; then, it started at a later retirement date. The rule changed following the enactment of the Secure Act in 2019, which pushed the RMD beginning age from 70½ to 72.
The SECURE 2.0 Act increases the RMD age:
- If you turned 72 in 2023, your first RMD for 2024 is due by April 1, 2025
- For those turning 73 in 2024 through 2032, your first RMD is required by April 1 of the following year.
- The beginning age for RMDs is 75 for those who turn 74 after December 31, 2032.
Failing to manage these deadlines can result in hefty penalties. The IRS imposes a 50% excise tax on the amount not distributed as required.
Calculating RMD
The calculation of an RMD can be complex and depends on various factors, including the account balance at year-end, divided by a distribution period from the IRS’s Uniform Lifetime Table. The Joint and Last Survivor Table will apply to your situation if your spouse is your sole beneficiary and is ten years younger.
It’s important to remember that each retirement account you own most likely has its own RMD. You can aggregate the RMDs and take them from one IRA if you own multiple IRAs. But, if you have several 403(b) accounts, for example, you cannot aggregate the RMDs – you must calculate and distribute them separately.
Inherited Retirement Accounts
The RMDs for inherited retirement accounts follow different rules. The Secure Act of 2019 also changed these rules. Non-spouse beneficiaries must withdraw the entire balance within ten years of the original account owner’s death without any yearly distribution requirements.
However, these individuals are granted an exception and can take RMDs over their lifetime:
- Spouse beneficiaries
- Minor children
- Disabled individuals
- individuals not more than a decade younger than the original account owner
Understanding Required Minimum Distribution requirements is an essential part of retirement planning. Navigating your RMD can be complex, but with planning and professional guidance from financial and tax professionals, you can work toward taking RMDs, avoiding IRS fines, and maximizing your retirement savings.
Sources:
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs#
https://www.nstp.org/article/secure-act-2-0-%E2%80%93-when-does-the-rmd-start
