So you made it to retirement. You’ve got all this money stashed away for cool retirement stuff.  Trips, experiences, spoiling the grandkids, playing golf, puttering around in the garden, yada, yada, yada.  But then you reach 70 1/2 and something crazy happens.  “What do you mean I have to take money out of my retirement accounts?”  Welcome to the land of the Required Minimum Distribution (RMD) my friend!  This post will tell you about all the important things you need to know about RMDs so that you don’t get in trouble with Uncle Sam.

What is a RMD? When you reach 70 1/2 the IRS requires you to withdraw at least a minimum amount each year from all your IRAs and retirement plans and pay ordinary income taxes on the taxable portion of your withdrawal. If you don’t take withdrawals, or you take less than you should, Uncle Sam will assess you a “penalty tax” on the difference between the amount you withdrew and the amount you should have withdrawn. On top of that, you’ll still have to withdraw the required amount and pay any income tax due on the taxable amount.

What types of retirement plans do RMDs apply to? The RMD rules apply to all employer sponsored retirement plans like profit-sharing plans, 401K, 403B, and 457B plans. They also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs. While the rules also apply to Roth 401(k) accounts, they do not apply to Roth IRAs while the owner is alive.

When must I receive my RMD from my retirement account? You must take your first RMD for the year in which you turn age 70½. However, the first payment can be delayed until April 1 of the year following the year in which you turn 70½. For all subsequent years, including the year in which you were paid the first RMD by April 1, you must take the RMD by December 31 of the year. Two important points about actually “taking” the distributions:

  • Note that you can take it in installments; you are not required to take it as a lump sum.
  • If you decide to delay taking your first RMD until the next year, you’ll have to take two minimum distributions during that calendar year. This can put you in a higher tax bracket for that year, significantly increasing the tax you owe.

Who calculates the RMD amount? Although the IRA custodian, retirement plan administrator or even your accountant may calculate the RMD, it is the account owners ultimate responsibility for calculating the amount of the RMD.

How is the amount of the required minimum distribution calculated? The amount of the RMD amount is determined by applying a life expectancy factor (set by the IRS) to your account balance at December 31st of the previous year. To calculate your RMD:

  1. Download the IRS RMD Worksheets to help you peform the calculations
  2. Find your age in the IRS Uniform Lifetime Table
  3. Locate the corresponding life expectancy factor
  4. Divide the account balance as of December 31 of the prior year by your life expectancy factor

Note: If your spouse is more than ten years younger than you and is the sole primary beneficiary, you must use the Joint Life and Last Survivor Expectancy Table. You can find all the lifetime tables in IRS Publication 590B.

Can you take your RMD from one account instead of separately from each account? An IRA owner must calculate the RMD separately for each IRA, but can withdraw the total amount from one or more of the IRAs. The same applies to someone with a 403B. However, RMDs required from other types of retirement plans, such as 401K and 457B plans have to be taken separately from each of those plan accounts.

Can one withdraw more than the RMD? Yes. It is the “minimum” distribution you must take. You are always welcome to take more.

What happens if a person doesn’t take a RMD by the deadline or in the wrong amount? If an account owner fails to withdraw a RMD, the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the difference between what was and what should have been taken out is taxed at 50%. The account owner should file Form 5329 with their tax return for the year in which the full amount of the RMD was not taken.

Can a distribution in excess of the RMD for one year be applied to the RMD for a future year?  Quite simply stated…no.

How are RMDs taxed? Distributions are taxed at the account owners ordinary income tax rate. However, to the extent the RMD is a return of basis or is a qualified distribution from a Roth IRA , it is tax free.