What You Need to Know About RMDs - Rodgers & Associates
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What You Need to Know About RMDs

Planning for retirement involves both the expected and the unexpected, and there is much uncer­tainty surrounding the future. Inflation, taxes, healthcare costs, and investment decisions are all part of the process.

When am I required to withdraw money from my Traditional or Rollover IRA?

You must begin taking money from your IRA at age 72, but there are excep­tions. The rule for required minimum distri­b­u­tions (RMDs) requires the first distri­b­ution to be made by April 1 of the year following the year the IRA owner reaches age 72. The person whose 72nd birthday is on January 1 has 15 months before they must take their first RMD by April 1 of the following year. The twist on this rule is that if they waited until the first quarter of the next year to take the first RMD, their second distri­b­ution would be due by December 31 in the same tax year. For tax planning purposes, they may not want to take two distri­b­u­tions in the same year.

How do I calculate the amount of the RMD I must withdraw?

The Internal Revenue Service has issued proposed regula­tions that substan­tially simplify the calcu­lation of minimum required distri­b­u­tions from qualified plans, IRAs, and other related retirement savings vehicles. The calcu­lation is based on the following factors:

Consulting with a tax profes­sional or financial adviser is extremely important for many investors when deter­mining who should be named as your benefi­ciary and what methods should be elected when calcu­lating the required minimum distri­b­ution. Additional infor­mation can be found in the Internal Revenue Service Publi­cation 590‑B (PDF).

When am I required to withdraw money from my Roth IRA?

Roth IRAs are not subject to RMDs during the owner’s lifetime. RMDs for the benefi­ciary are required after the death of the owner. A surviving spouse can roll over the Roth IRA to their name and avoid RMDs. The spouse effec­tively becomes the new owner of the Roth IRA. For deaths occurring in 2020 or later, only certain non-spouse individual benefi­ciaries (called “eligible benefi­ciaries”) may continue to use their life expectancy to calculate the minimum amount that must be withdrawn each year.

All other non-spouse benefi­ciaries must use the 10-year rule to deplete the account. These benefi­ciaries have to draw down the account by the end of the 10th year following the decedent’s passing. The account can be drawn down in any fashion, provided it is empty by the end of the 10th year.

Do tax-deferred annuities have required withdrawals at a certain age?

Annuities are subject to the same RMD require­ments if they are held inside an IRA. Nonqual­ified annuities (those held outside a retirement account) generally have no oblig­ation to withdraw funds at any age unless required by the annuity contract itself. Some contracts force distri­b­u­tions or annuiti­zation to begin at a certain age, generally from age 85 to 100. A few contracts do not require the distri­b­ution of the proceeds until death.

Are there RMD requirements for my 401(k) or 403(b) plan at work?

The rules are mostly the same, with a few key differ­ences for employer-sponsored retirement plans. The first RMD must be taken in the year the account owner turns 72 and cannot be delayed until April 1 of the following year. If the account owner is still working and they don’t own more than 5% of the company, they qualify for the “still working” exception. The due date for their first RMD from their company plan after they have reached age 72 will be April 1 of the year after they separate from service. This exception only applies to the plan sponsored by the individual’s current employer.

What if I forget to withdraw the minimum amount at age 72, or I make a mistake on my RMD and don’t remove enough?

The penalty is 50% of the “under-withdrawal,” the difference between what you withdrew and what you should have taken out to meet the Required Minimum Distri­b­ution. Your IRA custodian firm should have systems in place to help you determine the dates and amounts you should withdraw from your IRA.

The same penalty applies if minimum distri­b­u­tions are not taken from inherited IRAs. The rules are a little trickier with inherited IRAs, and the benefi­ciary has options to choose which affect the RMD. You should consult a tax profes­sional or financial adviser who has experience handling inherited IRAs to evaluate the best distri­b­ution options for your situation.

Rick’s Insights:

  • RMDs are required from IRAs and other qualified retirement plans once you reach age 72.
  • Roth IRAs are exempt from RMDs until after the owner’s death.
  • Nonqual­ified annuities generally don’t have distri­b­ution require­ments except as required in the contract.