Required Minimum Distributions (RMDs) are calculated minimum amounts that must be withdrawn from your Qualified Retirement Accounts each year after you reach a certain age. Because these accounts have grown tax-deferred the IRS requires these distributions to earn tax revenue. The CARES Act in 2020 allowed for RMDs to be skipped but they are set to resume this year.
Which Accounts do RMDs Apply to?
The minimum distribution rules apply to the following accounts: Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans (including Roth 401k balances not moved to a Roth IRA), 403(b) plans, 457(b) plans, Profit Sharing Plans, and other defined contribution plans.
At What Age Do I Have to Take an RMD?
There are different rules based on the year you were born and if you have inherited a retirement account from someone else. If you were born before July 1, 1949 you needed to start taking RMDs the year you turned 70 ½ or you could have delayed your first RMD to April 1st the following calendar year. All remaining RMDs are to be taken annually before December 31st.
In 2019 the SECURE Act changed the RMD age. For those of you born after June 30, 1949, you are to start your RMDs when you reach the age of 72. If your 72nd birthday is in 2021, you must take your first RMD before April 1st, 2022. If you wait until 2022, you will have to take 2 distributions in that year. All remaining RMDs are to be taken annually before December 31st.
The SECURE Act also changed the RMD rules for inherited retirement accounts. Depending on when the individual passed away (before or after December 31, 2019), you can either stretch the RMDs over your life expectancy (decedent passed before 12/31/2019) or you might be required to exhaust the account within 10 years (decedent passed after 12/31/2019).
If you are still working, you might be able to delay taking RMDs from a 401k, 403(b), profit-sharing, or other contribution plan if your employer allows.
You may also avoid taking RMDs on your Roth 401(k) by rolling the balance over to your personal Roth IRA.
How is the RMD Calculated?
The minimum amount you must withdraw is based on the previous year’s ending account balance. The total is divided by the applicable Distribution Period set by the IRS in the Life Expectancy tables in Publication 590-B. There are different Life Expectancy tables based on your beneficiaries and whether or not you have inherited the retirement account needing an RMD.
The penalties are steep if you miss taking an RMD, or do not take enough; you might have to pay a 50% excise tax on the amount not taken! Talk to your advisor if you have any questions about your current, or future, RMD.