What to Know About Required Minimum Distribution Rules
At What Age Do RMDs Start?
The Internal Revenue Service requires that you begin taking withdrawals from your qualified retirement accounts when you reach age 72. These withdrawals are referred to as required minimum distributions (RMDs). Accounts affected by this rule include traditional IRAs, 401(k)s, 457 plans, and other tax-deferred retirement savings plans like TSPs, 403(b)s, TSAs, SEP IRAs, and SIMPLE IRAs.
Here's what you need to know about RMDs.
Why Do Required Minimum Distributions Exist?
Investment gains within a retirement account aren't taxed until they're withdrawn. If you have other sources of income, and if RMDs didn't exist, you could hypothetically live off your other sources of income and never pay taxes on the retirement account gains—they could potentially be passed onto family or friends as an inheritance without creating a taxable scenario.
Enforcing RMDs is the government's way of making sure the IRS receives taxes on the gains held within a retirement account.
Account-holders are therefore required to withdraw a minimum amount from their retirement funds—and pay tax on that money—each year after they reach a certain age. You must do so by April 1 of the year following the year in which you reach age 72. After the first RMD, you must continue taking RMDs annually by December 31.
When Must I Start Taking Required Minimum Distributions?
Many taxpayers won't have to take their first RMDs until April 1 of the year after they reach age 72, but the rule wasn't always this generous.
It was age 70½ before the passage of the Setting Up Every Community for Retirement Enhancement (SECURE) Act in December 2019. Anyone who is covered by the old rules (those born before July 1, 1949) has already begun paying RMDs and must continue to do so. Everyone else can wait until April 1 of the year following the year in which they reach age 72.
If you wait until the last minute for your first RMD, you will effectively have to take two RMDs in the same calendar year. That's because the deadline for your first RMD is April 1, but all subsequent RMDs are due December 31. Therefore, if you turn 72 in 2021 wait until March 31, 2022 to make your first RMD, you'll have to take another RMD in December 2022.
The CARES Act RMD Waiver for 2020
Senior taxpayers get a bit of a break in 2020, however. The IRS announced in March 2020 that RMD requirements would be waived in response to the coronavirus pandemic under the terms of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Taxpayers do not have to take RMDs in 2020 (or by April 1, 2021, in cases of those who would otherwise be making their first RMD).
Those who took an RMD before the CARES Act went into effect in March could roll those funds right back into a retirement account as though the withdrawal didn't happen, but these rollovers had to happen by Aug. 31, 2020—so the window for this action is now closed.
How Much Do I Have to Take Out?
The amount of your required minimum distribution is based on two factors:
- Your prior year’s account balance as of December 31
- A table published by the IRS that calculates RMDs based on your age
You would use your age as of your birthday in the year of your distribution. Use the age as of your 2021 birthday if you're taking a distribution in 2021.
The IRS provides this Uniform Lifetime Table on its website to pinpoint how much your RMDs should be depending on your age. Additional charts are provided if you're a joint and last survivor of the account, or single.
You can direct your RMD to a charity and it won't be reported as taxable income on your tax return. It's referred to as a "qualified charitable distribution."
How Do I Calculate My Required Minimum Distribution?
Take your prior year’s December 31 IRA account balance, look up your age on the appropriate table, and divide your account balance by the remaining distribution period based on your age. Let's say "Bob" had $100,000 in his IRA on December 31 of the prior year. Bob decides to take his first distribution in the year in which he turns 72. His remaining distribution period is 25.6.
- $100,000 / 25.6 = $3,906.25
The amount Bob must withdraw for the calendar year in which he turns 72 is $3,906.25.
It would work out like this over the first 20 years from age 70 through age 90:
|First 20 Years of the Required Minimum Distribution Table (Uniform Lifetime)|
How RMDs Affect Roth Accounts
You aren't required to take minimum distributions from a Roth IRA because you paid taxes on your contributions at the time you made them—Roth IRA contributions are made with "after-tax" dollars. You're required to take RMDs from other types of Roth accounts, however, because you got a tax break for those contributions.
IRS rules require that you take RMDs from Roth 401(k)s at retirement, as opposed to Roth IRAs, but you can roll your Roth 401(k) into your Roth IRA to avoid this requirement.
Your beneficiaries must take RMDs from inherited Roth IRAs. They can't let the funds grow tax-free forever. They must start taking a specified amount out each year.
Although you can't roll your required minimum distribution to a Roth IRA, you can distribute funds from your IRA "in kind." This means you distribute shares of an investment instead of cash. Those funds then remain invested in a brokerage account.
Are There Penalties for Not Taking My RMD?
The penalty for not taking a required minimum distribution is a tax of 50% on any amounts that were not withdrawn in time. The penalty can be waived, however, if you can establish that you failed to take the RMD due to reasonable error and that you've taken steps to remedy the situation. You can file Form 5329 with the IRS to request a waiver from the penalty, along with a letter explaining what went wrong.
- Required minimum distributions prevent taxpayers from investing money into certain retirement plans tax-free and never paying taxes on gains because the money is never withdrawn.
- Account owners must withdraw a minimum amount annually beginning at age 72.
- The RMD age was previously 70½, but it was adjusted upward to 72 by the SECURE Act of 2019 for those born after June 30, 1949.
- The CARES Act further waived RMDs for 2020 in response to the coronavirus pandemic.