The required minimum distribution, or RMD, is the minimum amount that you have to pull out of your IRA, SIMPLE IRA, SEP IRA or retirement plan account. According to the IRS, If you reached the age of 70½ in 2019 the prior rule applies, and you must take your first RMD by April 1, 2020. If you reach age 70 ½ in 2020 or later you must take your first RMD by April 1 of the year after you reach 72. The purpose of requiring distributions is to make sure this amount is not forever tax-deferred.
You’re allowed to withdraw more than the minimum amount; any withdrawals from a Traditional (tax-deferred) retirement account will be included in your taxable income, minus any amount that has already been taxed or can be considered tax-free, such as funds in Roth accounts. Let’s look at how you can figure out this amount.
How Do You Calculate Required Minimum Distribution
Different life circumstances determine how to calculate your RMD. RMD calculations are different depending on if you are calculating amounts from an account you created, an account you inherited from your spouse, an account you inherited from a spouse who is 10 years younger than you or an account you inherited from a non-spouse.
To calculate the required minimum distribution for a given year, take your account balance for the previous calendar year and divide it by a distribution period from the federal uniform lifetime table.
The IRS provides 3 tables to use to calculate life expectancy: Table 1 (Single Life Expectancy For Use By Non-Spouse Beneficiaries), Table II (For Use by Owners Whose Spouses Are More Than 10 Years Younger and Are the Sole Beneficiaries of Their IRAs) and Table III (Uniform Life for Single Owners and Married Owners with Spouses Who Aren’t More Than 10 Years Younger).
The RMD calculation rules are more detailed than discussed in this article, but you can get a general idea where to start. Additionally, the brokerage or other financial institution that holds the accounts can help you figure out the correct amounts.
Keep in mind that the IRS looks at the total amounts of retirement account money you own, so you need to add up the balances from all your accounts if you have more than one. In the event that you inherited your IRA from its original owner who is not your spouse (in other words, if you are not the original owner), you’ll use the required minimum distribution that the account owner would have received the year of their death. For the following year, use the single life table to calculate life expectancy based on your own age. Once you do this, divide the life expectancy by the account balance to determine the first required minimum distribution; each following year reduces the life expectancy by 1.
You can use this worksheet to determine the current year’s required minimum withdrawal unless your spouse is your sole beneficiary and is 10 or more years younger than you. Here is the appropriate table for that purpose. If you are an IRA beneficiary seeking pertinent information tables, you’ll find them here. Charles Schwab also offers a host of RMD calculators.
What Retirement Accounts Have RMDs?
All employer-sponsored retirement plans have required minimum distributions. These include:
- Profit-sharing plans
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Traditional IRAs and IRA-based plans such as SIMPLE IRAs, SARSEPs and SEPs.
- Roth 401(k) accounts
What if You Do Not Take a RMD?
Failing to take a required minimum distribution is not consequence-free. For this reason — and if you fail to take a large enough minimum distribution — you may be subject to a 50% excise tax on the balance of the required amount that was not distributed.
You would report a missed distribution on Form 5329. This form may be used to report additional taxes on IRAs and other qualified retirement plans. Qualified retirement plans include a qualified pension, profit-sharing or stock bonus plan (excluding 401(k) plans), a tax-sheltered annuity contract, a qualified annuity plan or an IRA. For the purposes of this form, a traditional IRA is any IRA other than a SIMPLE IRA or Roth IRA.
The IRS considers a failure to take a required minimum distribution a case of excess accumulation, with the excise tax known as an excess-accumulation penalty. If you file Form 5329, it must be done along with Form 1040 or Form 1040NR.
RMDs and Inherited IRAs
There are specific rules for calculating the RMDs of inherited IRAs. These regulations are partially dependent on the age of the account owner upon death.
Rules for spouses and individual beneficiaries are listed below. Know the rules for nonqualified beneficiaries, that is, beneficiaries that are not living people, such as organizations, charities, nonqualifying trusts or the IRA owner’s estate:
- If the IRA owner died before their required beginning date of distributions, the nonqualified beneficiary must redeem the whole account balance by the end of the 5th year following the year of the IRA owner’s death.
- If the IRA owner died on or after the required beginning date, you as the nonqualified beneficiary must begin taking distributions by December 31 of the year following the year of the IRA owner’s death based on that owner’s remaining life expectancy — and if the owner did not take a required minimum distribution for the year, you must do so.
If you are inheriting a Roth IRA, you must figure out your required minimum distributions in the same sense as if the account owner died before his or her required beginning date, no matter the actual date of death.
RMDs for a Spouse Inheriting an IRA
If you are the spouse and sole designated beneficiary who is calculating an inherited IRA required minimum distribution, you can:
- Treat an IRA as your own.
- Base required minimum distributions on your current age.
- Base required minimum distributions on the original owner’s age at death, with the distribution period reduced by 1 each passing year.
- Take out the entire balance by year’s-end of the 5th year following the account owner’s death; if this happened before the required beginning date, you can wait until the owner would have turned 72 (or 70 ½ if this occurred prior to the beginning of 2020) to take distributions.
RMDs for a Non-Spouse Inheriting an IRA
If you are an individual beneficiary other than a spouse, you can:
- Pull out the whole account balance at the end of the 5th year after the account owner’s death provided the account owner died before the required beginning date. Figure out the required minimum distribution by plugging in the distribution period from the single life table (Table I) based on:
- If the owner died after distributions began (use the longer of your remaining life expectancy determined in the year after the year of the owner’s death minus one year for each subsequent passing year)
- If the account owner died before distributions began (use your age at year-end of the following year after the owner’s death and remember to reduce the distribution period by 1 for each following year)
How to Avoid RMDs
If you don’t need the money, you may avoid taking required minimum distributions in order to keep your tax-deferred status. Here are a few ways to do this.
If you are currently working: If you continue to work past the age of 72 and are investing in a 401(k) plan — and don’t own 5% or more of your company — you may be able to delay distributions until retirement. This rule applies only to the plan where you currently work. The required minimum distribution rule still applies to IRAs or 401(k) plans from a former employer.
Limiting Distributions in the First Year: You can also limit your distributions in the 1st year. By taking the 1st distribution as soon as you can, you can avoid having to take a 2nd distribution in the same year. Many IRA holders find themselves doing just that — holding off on their first required minimum distribution to be in a lower tax bracket at retirement. This can make sense depending on your situation, but it can also result in more taxable income since you will have to take 2 distributions later.
Converting to a Roth IRA: This method can also help you avoid required minimum distributions. Unlike a traditional IRA or Roth 401(k), Roth IRAs require no distributions. By rolling over some of your savings into a Roth IRA, you can let the money pile up tax-free. While saving in a Roth rather than a Traditional tax-deferred account won’t lower your taxable income in the year of contribution, you also won’t get hit with taxes on withdrawals decades later when you start to withdraw the money (if you are older than 59½ and have had the account for 5 or more years).
There are also exceptions to the early-withdrawal penalty, such as a first home purchase or college tuition. You will have to pay taxes all at once, however, when you move pretax money from your retirement account to a Roth IRA — let the saver beware.
Charity: Finally, donating your distributions to a qualified charity means that instead of going to the feds, your cash is going to a cause of your choice. You can do this under the qualified charitable distribution (QCD) rule, which applies to traditional IRA account holders but not to 401(k) plans. If your contribution totals $100,000 or less and is rolled over directly from the IRA to the charity, you won’t get hit with taxes. Keep in mind, though, that the IRS must deem your given charity qualified for such contributions.
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While understanding how to handle RMDs isn’t always cut-and-dried, the fact that you’re taking steps to do your due diligence -- including reading this article -- makes getting your hands around this topic more manageable. It also means you’ll be able to avoid excess taxation and other fees going forward.