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Q&A for Required Minimum Distributions

The Required Minimum Distribution, or RMD, is an IRS mandated amount of money that must be withdrawn annually from your retirement plan(s) that is subject to ordinary income tax. RMDs start the year you turn 72 years of age or age 70½ if prior to December 31st, 2019. For inherited IRA’s, there are different regulations depending on your relationship to the previous account owner. It is important to be aware of the IRS rules and potential penalties associated with RMDs so that you, and the people you are leaving your legacy to, avoid any costly mistakes.

What types of retirement plans are subject to RMDs?

The RMD rules apply to tax-deferred plans, such as the Traditional IRA, 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.

Exceptions: Roth IRA contributions are after-tax, so minimum distributions are not required until after the death of the account 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When must the first RMD be withdrawn from my retirement account(s)?

Per the SECURE Act of 2020, you must take your first required minimum distribution the year you turn 72 years old. However, the first distribution can be delayed until April 1st  the following calendar year. The deadline for all subsequent years is December 31st of the same calendar year.

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

How is the amount of the RMD calculated?

An RMD must be calculated for each individual retirement account. The calculation is done by dividing the previous year’s balance of the account 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)

If you have multiple retirement accounts, combine the calculated RMD for each individual account and you have your total RMD amount that must be withdrawn for that year. See the worksheets to calculate required minimum distributions and the FAQ below for different rules that may apply to 403(b) plans.

Is there an easier way to figure out my RMD?

Yes, in 2002 the IRS mandated that the custodians or issuers of the retirement plans must report the amount of the RMD on Form 5498 for individual account owners.

If you have consolidated all your retirement accounts into your IRA account at Preferred Trust Company, you can refer to Form 5498 (issued January 31st of each year), Box 12b, for your annual RMD amount. Box 12a is the date that the RMD must be withdrawn by.

If you have more than one open retirement account, your plan sponsor or custodian for each account should calculate your RMD and report it in Form 5498 Box 12b. Combine all these amounts and you will have the total RMD that you will need to take for that year.

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 across multiple IRA accounts. 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 must be taken separately from each plan.

Who is responsible for executing my annual RMD?

You are ultimately responsible for ensuring that your full RMD is taken each year from your retirement account(s). Preferred Trust Company clients can login to their online account portal to complete a One-Time Distribution Form or Recurring Distribution Form. Distributions of your assets (i.e., precious metals, digital currency, or real estate) can be taken as well by filling out the In-Kind Distribution Form.

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 will be subject to 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.

How are RMDs taxed?

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

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. To qualify for this pardon, you must file Form 5329 and attach a letter of explanation. See the IRS instructions to submit Form 5329.

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.