Required minimum distributions, or RMDs, are congressionally mandated withdrawals from a qualified retirement plan. RMD rules dictate the minimum amount you must withdraw from your account every year beginning by age 72 or 70.5, depending upon your age on Jan. 1, 2020.
These rules are in place so the Internal Revenue Service can start taxing income that had previously been in a tax-advantaged account such as a 401(k), traditional IRA, or SEP-IRA. Taking the time to understand how RMD rules work is an important part of everyone's retirement income planning process.
What Are Required Minimum Distributions?
If you've been deferring taxes for decades in a retirement account, you can bet that Uncle Sam will want to get his hands on his share eventually. Required minimum distributions mandate that you start withdrawing money from the plan in order to begin paying taxes on it. This doesn't have to happen right at retirement age but will begin within a few years, depending on when you were born.
- If you turned 70.5 before Jan. 1, 2020, you must begin RMDs at age 70.5.
- If you turned 70.5 on or after Jan. 1, 2020, you must begin RMDs at age 72.
The CARES Act waived all RMDs from 401(k) and other defined contribution plans for 2020, including your first RMD (as long as you had not already taken the distribution before Jan. 1, 2020).
According to RMD rules, starting with the April 1 in the year after you reach the required age, you must begin taking annual distributions from your qualified retirement plans. For all subsequent years, including the remainder of the year in which the first RMD distribution occurred by April 1, you must take an RMD by December 31 of the year.
This applies to any retirement accounts into which you made tax-deferred contributions, including 401(k) plans, Roth 401(k) plans, 403(b) plans, 457(b) plans, traditional IRAs, and other IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
- Acronym: RMD
In most cases, the RMD rule only applies if you have retired. If you're still working, you can continue to delay withdrawals. However, for IRA accounts, if you own 5% or more of the business that holds the plan, you must begin distributions at the required age even if you are still working.
How the RMD Calculation Works
The amount you must withdraw is based on the value of your accounts at the beginning of the year for which you are required to take a distribution. That total is then divided by your life expectancy as determined by the IRS. One of three separate tables is used, depending on your situation:
- The sole beneficiary is the owner’s spouse who is more than 10 years younger than the owner
- You have other beneficiaries besides your spouse or your spouse is not more than 10 years younger than you
- You're the sole beneficiary of the account
The IRS's website has worksheets that can help you figure out your minimum distribution for the year. There are also online calculators that will do the same job. Many retirement plan custodians or financial planners can help you calculate your RMD, but keep in mind they are not required to do so.
For most retirees, RMD rules have no real impact on how they use their retirement funds, as most begin to take distributions well before age 70.5 or 72 as a means of obtaining income for their retirement. Most retirees also withdraw more than the minimum amount.
Rules for Distribution After Death
The rules change a bit if the owner of an account requiring RMDs dies.
For plan holders that died before Jan. 1, 2020, the plan balance must be distributed to its beneficiary in full within five years or over their remaining lifetime, beginning within one year of the plan holder's death. For plan holders that die after Dec. 31, 2019, the entire balance of the plan must be distributed within 10 years. There are exceptions for some beneficiaries, include a surviving spouse, minor children, a person no more than 10 years younger than the plan holder, or a person who has a disability or chronic illness.
For those fortunate retirees who have other sources of retirement income or who might otherwise not spend the assets in their qualified retirement accounts, the RMD requirements kick in and create taxable income they may not have been planning on receiving. And just like any other retirement income, you can put your RMD toward living expenses, a taxable investment account, or a monetary gift to charity. The only thing you cannot do is reinvest the money in another qualified retirement account.
The penalty for not taking an RMD is steep: It's a tax of 50% on the amount that was not withdrawn in time.
Roth Accounts and RMDs
It is important to note that Roth IRAs are not subject to RMD rules during the account owner's lifetime unless they are inherited accounts, in which case different rules for distributions apply. However, Roth 401(k)s are still subject to required minimum distribution rules. You can avoid taking RMDs from a Roth 401(k) by rolling the account over to a Roth IRA, but you will have to pay taxes on any employer contributions that were made pre-tax.
You can learn more about all the account types subject to RMD rules and other information about RMDs by visiting the Internal Revenue Service's FAQ page on RMDs.
- Required minimum distributions (RMDs) are mandatory withdrawals that must be made from certain qualified retirement plans after a retired plan holder reaches a certain age or dies.
- In general, RMDs apply to most retirement plans that have grown tax-deferred.
- The exact amount of your annual RMD will be determined based on your life expectancy, plan beneficiaries, and your spouse's life expectancy, depending on your circumstances.