Required Minimum Distribution rules

When making minimum distributions from a retirement account, the required minimum distribution is a term that refers to the lowest amount of money that you must withdraw from said account every year once you reach the age limit. You can withdraw more than the minimum if you would like to, but keep in mind that the withdrawals you make will be included as part of your taxable income. 

The main exception is money that was taxed prior to being deposited into the retirement account or money that can be withdrawn tax free, which is a benefit that exists for qualified distributions pulled from Roth accounts. In that context, other examples may include traditional individual retirement accounts, 401(k)s, 403(b) accounts, 457(b) plans and profit-sharing plans.

Now, going back to the RMD, the value of which, no matter the year, is equal to what the balance of the account is at the end of the immediately preceding calendar year. This is better explained by a distribution period defined by the IRS’s Uniform Lifetime Table.

Please recognize that changes have been made to the way things work, and as a result of the SECURE Act, people who turned 70 years old on or after July 1, 2019, can wait to take withdrawals from their account until they turn 72. The primary exception is a Roth IRA, which does not require account owners to withdraw any funds, even if that means they pass away without ever withdrawing. (Also, note that the new RMD age is 73 if you reach age 72 after Dec. 31, 2022.)

That said, if the sole beneficiary just so happens to be the owner’s spouse and if that spouse is 10 or more years younger than the account owner, then a separate table from the Uniform Lifetime Table must be used. But don’t worry! There are predefined worksheets that you can fill out to calculate the required withdrawal amount.

There are three main ways to calculate the RMD: the Uniform Lifetime Table; Table I: Single Life Expectancy; and Table II: Joint Life and Last Survivor Expectancy.

The Uniform Lifetime Table

This table is best for those who are unmarried IRA owners, especially if they plan to calculate the value of their withdrawals themselves. It’s also suitable for married IRA owners with spouses who are no more than 10 years their junior. Last but not least, IRA owners who are married to people who are not the sole beneficiaries of their spouse’s IRA can use this table as well.

Table I: Single Life Expectancy

Table I is intended to be used by beneficiaries of an IRA when these beneficiaries are not spouses of IRA owners.

Table II: Joint Life and Last Survivor Expectancy

Table II is ideal for IRA owners who are married to spouses who are both the sole beneficiaries of the IRA as well as more than 10 years younger than the IRA owner.

What happens if you don’t take the RMDs? The consequence is that you will have to pay an excise tax equal to 50% of the amount that was not distributed as required. And what happens when the account owner dies? Ultimately, within the year of their death, you must use the RMD on the part of the account owner. The year after that, the value of the RMD for that account will be dependent on the identity and status of the account’s designated beneficiary.

What about inherited IRAs? If you inherited your IRA or other retirement plan account from the initial owner of the account, you must calculate your RMD because you are a designated beneficiary. In doing so, you can use the Single Life Expectancy table, which provides a life expectancy factor based on age. With this table in mind, the account balance will be divided by this factor to determine your first RMD. The life expectancy will be reduced by one year for each subsequent year that passes.

What’s the beginning date for your first RMD? For IRAs, including simplified employee pension plans and SIMPLE, or Savings Incentive Match Plan for Employees, IRAs, it’s April 1 of the year following the calendar year that you turn 70 1/2 years old as long as you were born prior to July 1, 1949. If that prerequisite does not apply to you, then the beginning date for your first RMD is April 1 of the year after the calendar year during which you turned 72 years old if your birthday is after June 30, 1949.

Now, let’s turn our attention to 401(k)s, profit-sharing plans and 403(b) plans. In most cases, you must withdraw the first RMD as of the first day of the April that follows the calendar year during which one of the following circumstances applies to you:

  • You turned 72 years old.
  • You turned 70 1/2 years old if your birthday precedes July 1, 1949.
  • You retired, as long as your plan allows you to take a distribution.

However, if you own at least 5% or more of the business that sponsors your IRA plan, you have to start withdrawing distributions by April 1 during the year that follows the calendar year during which you either turned 70 1/2 years old or turned 72 years old, as long as you were born after June 30, 1949. This applies regardless of whether or not you have retired.

It’s important to be aware of your required RMD start date. For each year thereafter, as well as the year of your start date, you must withdraw your RMD by Dec. 31.

This means you will usually need to keep track of two required distribution dates, those of which start with April 1 for the withdrawal you must make either during the year you turned 70 1/2 years old or during the year you are already 72 years old if you were born after June 30, 1949. The second date to pay attention to is Dec. 31, which is when you must make the additional withdrawal.

With all this information in mind, you should be well equipped when it comes to understanding how RMDs work and the rules surrounding them. As always, reach out to your Client Service Team member if you require additional assistance when determining the value of your RMDs and all other IRA-related concerns.

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