What’s a Required Minimum Distribution?

Required Minimum Distributions (RMDs) are amounts that the federal government requires you to withdraw annually from certain tax-deferred retirement accounts. These accounts are called tax-deferred for a reason. Participants accumulate earnings on their contributions tax-free over the years, postponing the payment of taxes, not eliminating them. The purpose of RMD rules is to have these taxable accounts distributed so they are not held tax free over the lifetime of the account owner and then left as an inheritance.

Kevin Wangen, Wealth Management Officer

When do I have to take my required minimum distribution?

The federal government recognizes that people are living longer and staying in the workforce longer. As a result, Congress has been adjusting the start date for RMDs. In 2019, the RMD age was raised from 70.5 to 72. With the passing of the SECURE 2.0 Act at the end of 2022, that age was raised to 73. In 2033, that age is set to bump up again to 75.

*There were no RMDs that began in 2023 due to SECURE 2.0 changes

What accounts require RMDs?

Not all retirement accounts have RMDs. Original owner Roth IRAs are exempt from RMDs (if certain conditions are met) since taxes were paid when the money was contributed. Roth 401(k) and 403(b) accounts are still subject to RMDs, however, there is proposed legislation to remove this requirement as soon as 2024. The following accounts are still subject to RMDs:

• 401(k)
• 403(b)
• 457
• Traditional IRAs
• Simplified Employee Pension (SEP) IRAs
• Simplified Incentive Match Plan for Employees (SIMPLE) IRAs
• Profit sharing plans
• Other defined contribution plans

You may be exempt from taking an RMD from an employer-sponsored retirement plan if you are still working and less than a 5% owner of the company, either directly or indirectly. Once you begin taking your RMD from an account, you must take them annually for life, even if you go back to work at the same employer. This rule does not affect the RMD status of any other accounts you may have.

How much do I need to withdraw for my RMD?

Each year the amount needed to satisfy your RMD changes according to your age. The calculation starts with taking the year-end balance for each tax-deferred retirement account, finding your age on the IRS Uniform Lifetime Table, and dividing the balance by the number from the chart. Please note that there is a separate chart for IRA owners whose spouses are more than 10 years younger and for IRA beneficiary account owners who are not the spouse of the IRA owner.

You must calculate the amount from each separate account from which an RMD is due. You may be able to aggregate the distribution from your IRAs and only withdraw from one. Defined contribution plans (401(k), 401(b), 457, etc.) require you to withdraw the RMD from each plan separately. Check with your accountant, financial advisor, or the custodian of your account to be sure.

The IRA custodian or retirement plan administrator may calculate the RMD, however, the account owner is ultimately responsible for taking the correct amount.

What happens if I don’t take my RMD?

There are stiff penalties for not taking your RMD in time. The penalty used to be 50% of the RMD amount not taken, however, that was lowered to 25% in 2023. Needless to say, it is important to take your RMDs in the year in which they are due to avoid this excise tax.

Anything else I should know about RMDs?

RMDs are not required from Roth IRAs for the owner of the account. If you are the beneficiary of a Roth IRA, you are subject to RMD rules.

You don’t need to take your RMD as one lump sum, you can take multiple distributions through the year to satisfy the amount.

You can also take more than the RMD amount, however, the excess amount does not apply to future years’ RMDs.

In the first year you are eligible for RMDs, you must take it by April 1 of the year after. Subsequent years after that are due by December 31 of that year. For example, if you turned 72 in 2022, your 2022 RMD was due by April 1, 2023. Your 2023 RMD is due by December 31, 2023.

If the RMD was not taken or, if less than the total due was taken, the penalty may be reduced from 25% to 10% if it is corrected within two years. If there was a reasonable error and steps were taken to remedy the shortfall, the IRS may waive the penalty. Please see your tax advisor for more information.

You are not able to roll your RMD amount into another tax-deferred account. You can invest it in a brokerage or other taxable account. Any gains or losses will be treated as they normally are from these types of accounts.

Required minimum distributions can be complex when you have multiple different types of retirement accounts. Feel free to contact us if you have any questions. We’re always here to help.