Required Minimum Distributions (RMDs)

Since contributions to tax-deferred retirement accounts are tax deductible, and the earnings grow tax-free, the federal government wants to tax the money eventually, so you must start receiving required minimum distributions (RMDs) by age 73. You can withdraw more than the RMD, but the RMD is the minimum you must withdraw to avoid steep penalties. You must take RMDs from a traditional IRA, even if you continue to be employed. However, you can delay RMDs from employer-sponsored plans, like 401(k)s, until after your retirement if your plan allows it, and if you do not own at least 5% of the company.

RMDs are required for account owners and beneficiaries of all tax-deferred retirement plans, including:

Distributions from qualified retirement plans, such as a 401(k) plan, are determined by the employer's plan document for the retirement account. Your plan administrator should provide the distribution options for taking your RMDs.

Note that Roth accounts are now allowed for SIMPLE IRAs and SEPs. Roth accounts and Roth IRAs are not subject to RMDs; only tax-deferred accounts are subject to RMDs. However, inherited Roth IRAs have the same RMD requirements as inherited traditional IRAs. Withdrawal of contributions by beneficiaries is tax-free and withdrawal of earnings is also tax-free if at least 5 years have elapsed from January 1 of the year when the Roth IRA was established; otherwise, withdrawal of earnings, but not withdrawal of contributions, is taxable. Any withdrawals are considered to be 1st from contributions, then from earnings. So, withdrawals will be tax-free if the total withdrawals are less than the total contributions to the account or if the 5-year period has elapsed. RMD requirements can only be satisfied by withdrawing from Roth accounts previously owned by the same decedent. Roth accounts inherited from other decedents will have separate RMD requirements. The rest of this article deals with RMDs from traditional IRAs.

The RMD for traditional IRAs is calculated using the total amount in all of your traditional IRA accounts, but you can take the RMD from any account.

RMDs cannot be rolled over. The IRS treats any distribution when an RMD is required as part of the RMD, which is not eligible for rollover or direct transfer. Therefore, the full RMD must be taken 1st, before any amount can be rolled over or transferred.

If the distribution is less than the RMD, then a 25% excise tax penalty will be assessed on the difference unless there was a reasonable cause for the shortfall. The 25% penalty is reduced to 10% if the insufficient distributions are corrected within 2 years, defined in final regulations as the last day of the 2nd taxable year after the year when the excise tax applies and by filing Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts and attaching a statement explaining that a reasonable error caused the underpayment and that you have or will correct the shortfall.

Insufficient RMD Tax Penalty

Example: How the RMD Excise Tax Penalty Applies

Example #1:

Example #2:

Both the calculation of the penalty or a request to waive the penalty must be made on Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, which is attached to your tax return.

The 1st distribution must be received by April 1 of the year after the year when you reach 73. The account balance at the end of the previous year when you reach 73 must be used, even if you choose to receive the distribution in the next year. In calculating the balances, you must account for any rollovers within 60 days of the year-end, even if the contribution was made in the next year.

However, it is generally better if you take the 1st distribution after reaching age 73 since waiting until the next year will require 2 distributions for that year, for which a higher applicable marginal tax rate may apply. Thereafter, annual distributions must be received by year-end.

If you die before satisfying the RMD for the calendar year, then the account beneficiary must take the missed RMD by the later of the:

The RMD is based on the Uniform Lifetime Table published by the IRS, which lists life expectancy by age. The trustee or custodian of the retirement account must report the RMD amount to you by January 31 of the year of the required distribution.

In certain cases, you may have to calculate the RMD. To figure the RMD, the RMD for each retirement account must be calculated separately, then totaled. Then you can receive the total RMD from any of the accounts.

The next step is to divide the account balance by the applicable life expectancy. The Uniform Lifetime Table, which can be found in Publication 590, provides 3 tables:

  1. Table I, Single Life Expectancy and for Beneficiaries is for beneficiaries.
  2. Table II, Joint Life and Last Survivor Expectancy is for married owners whose spouse is more than 10 years younger and are the sole beneficiaries of their IRAs.
  3. Table III, Uniform Lifetime is for unmarried owners, married owners with a spouse who is no more than 10 years younger, or for married owners whose spouses are not the sole beneficiaries of the IRA.

Table III is a joint life expectancy for you and a deemed beneficiary who is at least 10 years younger, regardless of the beneficiary's actual age or even if you have not named a beneficiary or if you change the beneficiary. When looking up the life expectancy from the table, use the age on your birthday in that year. The RMD must be recalculated every year based on the life expectancy for the increased age.

The Uniform Lifetime Table assumes that your beneficiary is 10 years younger than you, regardless of the beneficiary's actual age. If you have a spouse who is at least 10 years younger, then use the Joint Life and Last Survivor Expectancy Table, which will yield a lower RMD since the payouts will usually occur over a longer time. However, your spouse must be the sole beneficiary of the entire interest in the account during the entire calendar year for which the RMD is being figured; otherwise, the Uniform Lifetime Table must be used. If you were married at the beginning of the year, but subsequently divorce or your spouse dies, then you can still use the joint table when calculating RMD for that year. When looking at the values in the table, the relevant age is the age attained on your birthdays in that year.

RMD

Examples: Calculating RMDs

Example 1: 1 Account

Example 2: Multiple Accounts

Satisfy the RMD by Receiving In-Kind IRA Distributions Instead of Cash

Some people fret about RMDs because they don't want to sell their stock if the stock market is down substantially. Liquidating the stock to receive the RMD would incur losses that would otherwise not occur if the stock were held longer. However, instead of taking cash, you can receive a distribution in kind, transferring the stock to a taxable brokerage account instead of liquidating the stock to cash. You must pay tax on the fair market value of the stock when it is transferred and that would be your new basis in the stock when you sell later. Inform your custodian that you want to transfer the stock to a taxable brokerage account.

So, for instance, if you paid $20,000 for stock and it declines to $10,000, then you can simply transfer the stock to a taxable brokerage account, then pay tax on the $10,000 value of the stock, which will also be your basis in the stock when calculating profit or loss. If you hold the stock for more than 1 year afterwards, then your potential profits will be subject to the long-term capital gains tax rather than the ordinary tax assessed on all taxable retirement distributions.

Note, however, that you must use the fair market value of the stock to determine whether you have satisfied the RMD, not the original purchase price.

Reduce or Eliminate the RMD from Traditional IRAs with a Qualified Charitable Distribution

Taxpayers who are at least 70½ may donate cash, up to a certain inflation-adjusted limit, directly from their traditional IRAs to qualified charities. The taxpayer must be at least 70½ when the QCD is made; this age requirement is lower than the 73-year age requirement for RMDs. These qualified charitable distributions (QCDs) are tax-free to the taxpayer and are counted for RMDs. Furthermore, this tax benefit for a charitable contribution does not require itemizing deductions. However, QCDs are only allowed for IRA accounts, not other types of retirement accounts, such as 401(k)s, or SEP or SIMPLE IRAs.

Because the QCD does not increase taxable income, other benefits from keeping adjusted gross income AGI lower may include:

For more details, see IRA Distributions, Qualified Charitable Distributions.

Beneficiary RMDs

Distribution requirements for inherited retirement plan accounts and IRAs depend on whether the beneficiary is your spouse, whether your beneficiary is a minor child, is disabled or chronically ill, or is not an individual, and whether you died before or after your RMD date.

For the year of your death, the RMD is what you were required to, but did not, withdraw. For the year after your death, the RMD depends on your designated beneficiary and the distribution option they chose.

A designated beneficiary is anyone designated as the beneficiary of your IRA or retirement plan, but an eligible designated beneficiary (EDB) is a special beneficiary, defined as your spouse or your minor child (grandchildren or other descendants do not qualify), a disabled or chronically ill individual, or an individual who is not more than 10 years younger than you. The tax code defines a minor child as a child younger than 22 by year-end, regardless of state law.

There is a 5-year rule that requires your beneficiary to receive the entire account amount by the 5th year after your death year, but withdrawals are not required before then.

If the 10-year rule applies, then the entire account amount must be distributed by the 10th year-end after your death year.

Example: How Nonqualified Distributions from a Roth IRA to Beneficiaries Are Taxed

Spousal Beneficiary Options

Whether you died before or after your RMD date, your spouse may keep the account as an inherited account and take distributions based on their own life expectancy, or they can roll over the account into their own IRA.

If you died before your RMD date, then your spouse has additional options if the account is kept as an inherited account: delay beginning distributions until after you would have turned 73 or follow the 10-year rule.

Non-Spouse Beneficiary Options

An eligible designated beneficiary may receive distributions over the longer of their own life expectancy or your remaining life expectancy, or, if you died before your RMD date, they may follow the 10-year rule.

A non-eligible designated beneficiary must follow the 10-year rule, receiving the entire account amount before the 10th year-end after your death year. If you died on or after your RMD date, then your beneficiary must receive RMDs for years 1 - 9 after your death and withdraw all funds by the 10th year-end. A special provision automatically waives the 25% excise penalty for RMDs not taken from 2021 to 2024.

Co-Beneficiaries Should Split an Inherited IRA into Separate Accounts

If there is more than 1 beneficiary of an IRA as of September 30 of the year following the account owner's death, then the IRS requires that the life expectancy of the oldest beneficiary be used by all beneficiaries when figuring their RMDs. To prevent this, the account should be split so that each beneficiary receives their own account, especially if different tax rules apply to the beneficiaries (EDB versus non-EDB, such as a minor child and an adult child of the decedent).The IRS deadline for splitting an inherited IRA into separate accounts is December 31 of the year following the year of the account owner's death.

If an Estate Is the IRA Beneficiary

If the IRA beneficiary is an estate, then distribution requirements depend on whether the IRA owner died before the RMD date or afterwards. If before, than the entire account must be distributed by the end of the 5th year after the death year. If death occurs on or after the original owner's RMD date, then the distributions may be based on the remaining life expectancy of the IRA owner.

Successor Beneficiaries

If an IRA beneficiary dies before receiving the entire distribution from an inherited account, then different rules apply to how the remaining money must be distributed to successor beneficiaries. In most cases, a successor beneficiary would have to receive the entire distribution within 10 years. For more details, see IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).