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 70½ or age 72, depending on when you were born. These withdrawals are referred to as required minimum distributions (RMDs). Accounts affected by this rule include IRAs, 401(k)s, 457 plans, and other tax-deferred retirement savings plans like TSPs, 403(b)s, TSAs, SEP IRAs, and SIMPLE IRAs.
Why Do Required Minimum Distributions Exist?
Investment gains within a retirement account aren't taxed until they're withdrawn. You could live off other income and never pay taxes on some of your gains if you weren't forced to take an RMD annually. You could leave these accounts to family or friends as an inheritance without the IRS ever collecting any tax on that money if your beneficiary didn't make withdraws.
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 70½ or age 72, depending on your year of birth. Then 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 prior to the passage of the Setting Up Every Community for Retirement Enhancement (SECURE) Act in December 2019. Those who turned age 70½ before Jan. 1, 2020, are still required to take RMDs by April 1 of the year following the year in which they reached age 70½. Everyone else can wait until April 1 of the year following the year in which they reach age 72.
The rule regarding age 72 applies to taxpayers born after June 30, 1949. All others must begin taking RMDs in the year after they reach age 70½.
As an example, let's assume that Bob was born in August 1949, after the June 30 cutoff date. His first distribution must, therefore, occur by April 1 of 2022, the year after he turned 72, although he could take it in 2021 if he chose to.
Bob would have to take a required minimum distribution for both years if he waited until April 1 of 2022, the year following the year he turns 72. His decision to wait and take two distributions in the second year or to take his first distribution in the year he turns 72 would be based on which option results in the least taxes paid over those two years.
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.
If you took an RMD before the CARES Act went into effect in March, you can roll those funds right back into a retirement account as though the withdrawal didn't happen. The IRS announced in June 2020 that you have until Aug. 31, 2020, to exercise this option. You would normally be limited to this type of rollover just once a year, but this rule has been temporarily waived as well.
Rollovers made before Aug. 31, 2020, aren't subject to the limit of once every 12 months. Inherited IRAs qualify for this temporary amendment as well, although they're usually excluded from making rollovers.
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 2020 birthday if you're taking a distribution in 2020.
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. This loophole was originally a temporary addition to the tax code, but it was made permanent starting in 2016. 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. Using Bob as an example again, let's say he 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
This is the amount Bob must withdraw for the calendar year in which he turns 72.
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. 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 a certain age.
- The age 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.
FINRA. "Updated: Required Minimum Distributions—Common Questions About IRA Accounts." Accessed July 20, 2020.
IRS. "Retirement Topics — Required Minimum Distributions (RMDs)." Accessed July 20, 2020.
IRS. "IRS Announces Rollover Relief for Required Minimum Distributions From Retirement Accounts That Were Waived Under the CARES Act." Accessed July 20, 2020.
IRS. "IRA FAQs - Distributions (Withdrawals)." Accessed July 20, 2020.
IRS. "Publication 590-B (2019), Distributions from Individual Retirement Arrangements (IRAs)." Accessed July 20, 2020.
IRS. "Retirement Plan and IRA Required Minimum Distributions FAQs." Accessed July 20, 2020.