Required Minimum Distribution Rules

When making minimum distributions from a retirement account, the required minimum distribution (RMD) is the lowest amount of money that must be withdrawn annually once the account owner reaches the age limit. Although you have the option to withdraw more than the minimum, keep in mind that these withdrawals will be considered taxable income.

Exceptions to this rule include money that was already taxed before being deposited into the retirement account, as well as money that can be withdrawn tax-free, such as qualified distributions from Roth accounts. Examples of retirement accounts that fall under these exceptions include traditional individual retirement accounts (IRAs), 401(k)s, 403(b) accounts, 457(b) plans, and profit-sharing plans.

Determining the value of the RMD depends on the balance of the account at the end of the previous calendar year, regardless of the year in question. To provide clarity, the IRS’s Uniform Lifetime Table defines a distribution period.

It’s important to note that changes have been implemented due to the SECURE Act. Individuals who turned 70 years old on or after July 1, 2019, can delay withdrawals until they turn 72. However, this provision does not apply to Roth IRAs, as account owners are not required to withdraw funds, even in the event of their passing. (Please be aware that the new RMD age is 73 if you turn 72 after Dec. 31, 2022.)

If the sole beneficiary of a retirement account is the account owner’s spouse and the spouse is at least 10 years younger, a separate table from the Uniform Lifetime Table must be used to calculate the RMD. Rest assured, there are predefined worksheets available to assist in this calculation.

There are three main methods to calculate the RMD: the Uniform Lifetime Table, Table I: Single Life Expectancy, and Table II: Joint Life and Last Survivor Expectancy.

The Uniform Lifetime Table is an important tool for determining required minimum distributions (RMDs) for different situations.

Table I: Single Life Expectancy can be utilized by unmarried IRA owners who wish to calculate their own withdrawals. It is also applicable to married IRA owners with spouses who are no more than 10 years their junior. Additionally, IRA owners who are married to individuals who are not the sole beneficiaries of their spouse’s IRA can make use of this table.

Table II: Joint Life and Last Survivor Expectancy is designed for married IRA owners whose spouses are both the sole beneficiaries of the IRA and are more than 10 years younger than the IRA owner.

Failing to take RMDs can result in an excise tax equal to 50% of the undistributed amount. Upon the account owner’s death, the RMD must be taken within the year, and the subsequent RMD value depends on the identity and status of the account’s designated beneficiary.

For inherited IRAs, designated beneficiaries should calculate their RMDs using the Single Life Expectancy table, which factors in age. The account balance is divided by the life expectancy factor to determine the first RMD, with one year subtracted from the life expectancy for each subsequent year.

The beginning date for the first RMD depends on the type of IRA. For IRAs, including simplified employee pension plans and SIMPLE IRAs, it is April 1 of the year following the calendar year in which the individual turns 70 1/2 years old, if born prior to July 1, 1949. Otherwise, the beginning date is April 1 of the year after turning 72 years old, if the birthday is after June 30, 1949.

When it comes to 401(k)s, profit-sharing plans, and 403(b) plans, there are specific rules to follow. To determine your required minimum distribution (RMD) start date, consider the following circumstances:

– If you turned 72 years old, you must withdraw the first RMD as of the first day of the April that follows the calendar year.

– If you turned 70 1/2 years old and your birthday precedes July 1, 1949, you also need to take an RMD.

– If you retired and your plan permits distribution, you have to take an RMD.

– However, if you own 5% or more of the business sponsoring your IRA plan, you must begin withdrawing by April 1 of the following year if you turned 70 1/2 years old or 72 years old (if born after June 30th, 1949).

It is crucial to be aware of your RMD start date. From that year onwards, including the year of your start date, you must withdraw your RMD by December 31st.

This means you need to track two required distribution dates. The first is April 1st for the withdrawal you must make when you turn either 70 1/2 years old or 72 years old (if born after June 30th, 1949). The second is December 31st, which is when you make an additional withdrawal.

By understanding these rules, you will be equipped to handle RMDs and other aspects of your IRA. If you need further assistance, it is always recommended to consult a tax professional.