What to Know About Required Minimum Distribution Rules
At What Age Do RMDs Start?
The IRS requires that you start taking withdrawals from your qualified retirement accounts (IRA accounts, 401(k)s, 457 plans and other tax-deferred retirement savings plans like a TSP, 403(b), TSA, SEP, or SIMPLE) once you reach age 70 1/2. This requirement is called a required minimum distribution, or RMD.
Why Does an RMD Exist?
The IRS wants its piece of your earnings. If an RMD didn't exist, you could live off of other income and never pay taxes on some of your investment gains. Instead, you could leave these accounts to friends or family as an inheritance without the IRS collecting any taxes from you. The RMD allows the IRS to get their share.
When Must You Start Taking Required Minimum Distributions?
Your first RMD must occur by April 1st of the year after you reach age 70 1/2, but most people will find it most tax-efficient to take their first distribution in the year they reach age 70 1/2.
Example: Bob’s birthday is in February. Thus he turns 70 1/2 in August. His first distribution must occur by April 1st of the following year, although he could take it in the current year. If Bob waits until April 1st of the year following the year he turns 70 1/2, he will have to take a required minimum distribution for both years. His decision to wait and take two distributions in the second year, or take his first distribution in the year he turns 70 1/2 should be based on which option will result in the least taxes over those two years.
Do You Have to Take RMDs From a Roth?
You are not required to take minimum distributions from your own Roth IRA since you paid taxes prior to contributing. However, you are required to take RMDs from other types of Roth accounts.
For example, IRS rules require you take RMDs from Roth 401(k)s, however, at retirement, you can roll your Roth 401(k) into your Roth IRA and thus avoid this requirement.
You also must take RMDs from inherited Roth IRAs so when your children inherit your Roth IRA they can't let the funds grow tax-free forever - they have to start taking a specified amount out each year.
What If You Are Still Working at Age 70 1/2?
If you are still working and contributing to your employer-sponsored retirement plan, some plans will allow you to delay your RMD. Each qualified plan has its own set of rules. You have to check with your plan to see if you will be required to take distributions at age 70 1/2 if you are still working.
How Much Do You Have to Take Out?
The amount of your required distribution is based on two things: your prior year’s December 31st account balance, and an IRS table based on your age.
You use your age as of your birthday in the year of your distribution. So if you are taking a distribution in 2017, use the age that you attain on your birthday that occurs in 2017.
For your reference, the first 20 years (covering distributions for ages 70 to 90) of the most commonly used table, the Uniform Life Expectancy table, is listed at the bottom of this article. To calculate required distributions for someone over age 90, reference the complete Uniform Lifetime table on the IRS website.
If you have a spouse who is 10 years younger than you, or you are taking distributions as a non-spouse beneficiary of an IRA account, then get further information below;
- Joint And Last Survivor Table (see Appendix B)- Use if your spouse is ten years younger than you.
- Single Life Expectancy Table - Use if you are taking distributions as a non-spouse beneficiary.
Can You Rollover Your RMD to a Roth?
No, you cannot roll your required minimum distribution to a Roth IRA. However, you can distribute funds from your IRA in-kind, meaning you distribute shares of an investment instead of cash. Then those funds remain invested in a brokerage account.
Can You Direct Your RMD to a Charity?
You can direct your RMD to a charity, and it will not be reported as taxable income on your tax return. This provision was a temporary provision in the tax code but was made permanent starting in 2016. It is called a "qualified charitable distribution."
How Do I Calculate My Required Minimum Distribution?
To determine how much you have to withdraw, take your prior year’s December 31st IRA account balance, look up your age on the appropriate table, and divide your account balance by the factor (remaining distribution period) based on your age.
Example: Bob had $100,000 in his IRA on December 31st of the prior year. Bob is 70 and decides to take his first distribution in the year in which he turns 70 1/2.
- $100,000 / 27.4 = $3,649.63
This is the amount Bob must withdraw for the calendar year in which he turns 70 1/2.
Try an online RMD calculator to estimate your current or future year's required minimum distribution.
What About Penalties for Not Taking a Required Minimum Distribution?
The penalty for not taking a required minimum distribution is a tax of 50% on any amounts that were not withdrawn in time.
For additional information on required minimum distributions see:
IRS Retirement Planning Facts Regarding Required Minimum Distributions
First 20 Years Of The Required Minimum Distribution Table
|First Twenty Years Of TheRequired Minimum Distribution Table (Uniform Lifetime)|