Does My Traditional or Roth IRA Require RMDs?
Keep your money growing tax-free longer with the right IRA
Traditional and Roth Individual Retirement Accounts (IRAs) are both important retirement savings vehicles that are available to many regardless of whether or not they participate in an employer-sponsored retirement plan, such as a 401(k) plan.
As tax-advantaged accounts, both provide some tax benefits on the money you put into them, but they do so differently. Notably, Internal Revenue Service (IRS) rules dictate that you cannot keep your retirement funds in all your retirement accounts indefinitely. You must take required minimum distributions (RMDs) from certain tax-advantaged accounts at a certain point or pay a steep penalty.
Understanding whether traditional and Roth IRAs have RMDs and how to satisfy RMD rules can help you choose the right account for your financial needs in retirement.
RMDs Apply to Traditional IRAs
Certain retirement plans and individual retirement accounts, namely traditional 401(k) plans, traditional IRAs, SIMPLE IRAs, and SEP IRAs, require individuals to begin to withdraw money from their accounts once they reach age 72 if you reach age 70.5 on or after Jan. 1, 2020 (70.5 if they turned 70.5 before Jan. 1, 2020). These mandatory withdrawals, known as RMDs, dictate the minimum amount that you must withdraw from your retirement account every year.
The RMDs are included in the retiree's taxable income and are therefore subject to income taxes. Because tax-deductible accounts such as traditional IRAs allow you to deduct your contribution and defer taxes until retirement, RMDs give the IRS the opportunity to collect tax on money that was tax-free up until this point. For this reason, any portion of a withdrawal that was taxed before or should be treated as tax-free (Roth contributions to a 401(k) account, for example) won't be included as taxable income.
If you intend to heavily rely on the proceeds of your traditional IRA in retirement, the RMD requirement may be irrelevant, as you may need to begin withdrawals well before the RMD starting age. In fact, you may need to withdraw more than the required minimum to make ends meet in retirement. This is perfectly acceptable; as the name suggests, RMDs are simply the required minimum.
But for retirees who have other sources of retirement income or who may otherwise not need to spend the money in these types of retirement accounts after the RMD starting age, this requirement essentially triggers taxable income. Moreover, because a portion of the funds will no longer be in the IRA account after you start taking RMDs, the opportunity for future tax-deferred growth on those funds is lost.
RMDs are a requirement for traditional IRAs, SIMPLE IRAs, SEP IRAs, and 401(k) plans.
RMD Rules for Traditional IRAs
Regardless of whether you are still employed, you must take your first RMD from a traditional IRA, SEP IRA, or SIMPLE IRA by April 1 of the year following the year in which you turn 70.5 or 72, depending on your current age. If you turn 70.5 in 2020 or afterward, you'll have to take your first RMD by April of the year following the calendar year in which you turn 72. But if you reached age 70.5 in 2019 or before, you would have to take your first RMD by April 1 of the year following the calendar year in which you turned 70.5. For all subsequent years, including the year in which you received the first RMD by April 1, you must take the RMD by December 31 of the year.
If you don't begin to take withdrawals, or you withdraw a lower amount than you should have withdrawn, you'll get hit with a 50% excise tax on the difference between the amount you withdrew and the amount you should have withdrawn. You may also have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. To make matters worse, you'll still have to withdraw the required amount and pay any income tax due on the taxable amount.
The CARES Act waives the requirement to take RMDs from IRAs and other retirement plans for 2020, including your first RMD.
Figuring Traditional IRA RMDs
The IRS provides required minimum distribution tables to assist you in calculating your initial RMD and subsequent distributions. The specific table you must use depends on the account beneficiary, but all of them are available in Appendix B of Publication 590-B.
- Single Life Expectancy (Table I): Use this table to calculate your IRA RMDs if you are taking distributions as a non-spouse beneficiary.
- Joint Life and Last Survivor Expectancy (Table II): Reference this table if you have a spouse who is more than 10 years younger than you.
- Uniform Lifetime (Table III): Calculate your RMD using this table if your spouse isn't more than 10 years younger than you.
Obtain your estimated life expectancy from the first two tables or the distribution period from the third table. Then, use Appendix A, "Worksheet for Determining Required Minimum Distributions," to calculate your first RMD. You will need to divide your IRA account balance by your life expectancy or distribution period to obtain your RMD. For the purposes of the calculation, your account balance is the balance at the close of business on December 31 of the year prior.
Roth IRA RMD Considerations
Roth accounts offer similarly appealing, albeit different, tax benefits than traditional IRAs. You make post-tax contributions to a Roth IRA. While you can't deduct these contributions from your taxable income, the earnings grow tax-free as in the case of traditional IRAs, and you pay no tax on withdrawals in retirement.
Another potential benefit is that Roth IRAs don't require RMDs during the account owner's lifetime and are therefore not subject to the RMD rules. This means that even individuals older than the starting RMD age are not required to take any money from their Roth IRAs.
As in the case of traditional IRAs, this exception from RMD rules for Roth IRAs may not affect you if you intend to start withdrawals from your Roth IRA upon retirement before the RMD starting age. But for those who may not need to withdraw funds from their Roth IRA for retirement living expenses, a Roth IRA provides an incredible opportunity to allow your earnings to continue to grow tax-free or even pass on a growing inheritance to your heirs.
Figuring Inherited Roth IRA RMDs
While IRA account owners don't have to take RMDs during their lifetime, if you inherit a Roth IRA, then you as the beneficiary have to take RMDs according to the same rules that govern RMDs for traditional IRAs. However, you would calculate your RMDs as though the account owner had died before his required RMD start date.
If you're a spouse beneficiary, you can:
- Treat the Roth IRA as your own. You would need to appoint yourself as the account owner if you choose this option.
- Withdraw the entire balance by the fifth year after the owner's death.
- Calculate and take your distributions based on Table I. You don't have to start distributions until the owner would have reached their RMD starting age.
As a non-spouse beneficiary, you can:
- Withdraw the full balance by the fifth year following the owner's death.
- Calculate and take your distributions based on Table I.
The Bottom Line
Both traditional and Roth IRAs provide tax advantages. However, Roth IRAs impose no taxes on distributions, whereas traditional IRA withdrawals are taxable.
Roth IRAs also impose no RMDs on account owners during their lifetime, so they grant retirees the flexibility to spend their account assets when they want as opposed to the mandatory age at which seniors must start taking RMDs from a traditional IRA.
Tax-free growth ceases in a traditional IRA when RMDs begin. If you expect to have other retirement income sources, you may want to contribute to a Roth IRA in addition to or in lieu of a traditional IRA. Roth IRAs have an edge in this scenario as they allow you to continue to grow your account assets tax-free or even pass on your wealth to your heirs.