Q&A for Required Minimum Distributions

March 13, 2019 Blog No Comment

Your Required Minimum Distribution, or RMD, is the minimum amount that you must withdraw annually from your retirement plan(s) and pay ordinary income tax on. RMDs start the year you turn 72 years of age or, depending on the type of account, the year in which you retire. There are also different regulations regarding required distributions from inherited IRA’s. It is important to make yourself aware of the IRS rules and potential penalties associated with RMDs.

What types of retirement plans require minimum distributions?

The RMD rules apply to your Traditional IRA and IRA-based plans such as the SEPs, SARSEPs, and SIMPLE IRAs. The RMD rules also apply to all employer sponsored retirement plans, including profit-sharing plans, Traditional and Roth 401(k) plans, 403(b) plans, and 457(b) plans as well.

Exceptions: Roth IRA contributions are after-tax, so withdrawals are not required for this account type until after the death of the owner. Another exception is if you are still working and your employer sponsored 401(k) plan allows it, you can postpone RMDs until you officially retire. However, there is a caveat to this exception, you cannot have a 5% or more ownership interest in the business you are employed by in order to delay RMDs until official retirement. If you own 5% or more, then the RMDs must begin once you turn age 72 regardless of whether you are still working.

When must I withdraw my required minimum distribution from my IRA?

You must take your first required minimum distribution for the year in which you turn 72 years old. However, the first distribution can be delayed until April 1 in the year following the year in which you turn 72. The deadline for all subsequent years is December 31st.

Important Note: If you wait to take your first RMD by April 1 of the year following your 72nd birthday, you still need to take your RMD for that year before December 31st. Essentially, you will be taking a double distribution within that same year.

How is the amount of the required minimum distribution calculated?

If you have more than one account, an RMD is calculated for each individual account by dividing the previous year’s balance by a life expectancy factor that the IRS publishes in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Choose the life expectancy table to use based on your situation.

  • Joint and Last Survivor Table - use this if the sole beneficiary of the account is your spouse and your spouse is more than 10 years younger than you
  • Uniform Lifetime Table - use this if your spouse is not your sole beneficiary or your spouse is not more than 10 years younger
  • Single Life Expectancy Table - use this if you are a beneficiary of an account (an inherited IRA)

See the worksheets to calculate required minimum distributions and the FAQ below for different rules that may apply to 403(b) plans.

Who calculates the amount of the RMD?

You are ultimately responsible for calculating the amount of the RMD. If you need assistance making this calculation you should consult a tax professional.

How are RMDs taxed?

You will be taxed at your ordinary income tax rate on the amount of the withdrawn RMD.

What happens if I do not take an RMD by the required deadline?

If you fail to withdraw an RMD by the applicable deadline and/or fail to withdraw the full amount of the RMD, the amount not withdrawn suffers an excise tax of 50%. To report the excise tax, you will need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with your federal tax return for the year in which the full amount of the RMD was not taken on time.

Can the penalty for not taking the full RMD be waived?

Yes, the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. In order to qualify for this pardon, you must file Form 5329 and attach a letter of explanation. See the IRS instructions to submit Form 5329.

Can I take an RMD from one account instead of separately from each account?

You must first calculate the RMD separately for each IRA that you are the account owner, however, you can withdraw the total amount from just one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts.

However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts.

What are the RMD requirements for inherited IRA beneficiaries?

There are a few variables that can factor into what your options are when you inherit an IRA. Some of those variables include, when the account owner passed away (before or after reaching RMD age), what your relationship with the account owner was (i.e. spouse, child, brother/sister, friend, etc.), and your age at the time of inheriting the IRA. The SECURE Act of 2020 requires that if you are not an *eligible designated beneficiary you must distribute the entirety of the inherited IRA account by the end of the 10th calendar year following the year of the account owner’s death. See Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), for complete details on when beneficiaries must start taking RMDs from inherited IRAs.

*An eligible designated beneficiary is one of the following: (1) the surviving spouse of the deceased account owner, (2) a chronically ill or disabled individual, (3) a beneficiary who is not more than 10 years younger than the deceased, (4) a child of the deceased that is still of minority age.

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