Required Minimum Distributions

Required Minimum Distributions (or RMDs) are a seemingly simple aspect of investing but there are certain nuances that you will want to be sure you understand to determine if your account is subject to RMDs. The below information is important to understand, and can have drastic effects on your financial situation. It is also a general overview of the IRS rules on RMDs and not an exhaustive list. For a complete understanding and to determine your yearly RMD, consult your financial professional.

What are RMDs?

RMDs are mandatory distributions that are required to be withdrawn from qualified accounts at a specified point. The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive.

When must distributions be made?

The first RMD is required to be made the year that you reach age 70½. However, the first distribution can be delayed until April 1 of the following year. All subsequent RMDs are required to be made by December 31 of the year they are assessed. If the first RMD is delayed until the following year, that current year’s RMD will still be required, meaning that two RMDs will be assessed that year.

How is my RMD calculated?

Your RMD is typically determined by taking the December 31st account balance of the previous year and dividing it by the life expectancy factor that the IRS publishes in Tables III. Every year, the correlating life expectancy factor will be determined for your current age and divided into the December 31st account balance of the previous year.

Are my annual distributions limited to my RMD?

As the name suggests, this is a required minimum distribution. This means that additional distributions may be made, but at the very least, this distribution level must be met.

What are the consequences of missing an RMD?

The penalty for failing to distribute your RMD is very stiff. The excess-accumulation penalty is 50%. In other words, if your RMD was $10,000 and you failed to make that distribution, your penalty will be $5,000. If you have missed an RMD, consult an appropriate financial profession to start taking immediate steps to resolve the issue.

What if I have more than one account?

The RMD is assessed on the entirety of your applicable qualified assets. As long as you have taken an RMD from your IRA accounts for all of your IRA assets subject to RMDs, it does not matter which account the assets are withdrawn from. You can divide the distributions between all of your applicable accounts, or just take the distribution from one account.

This rule applies to IRAs. Employer plans must be calculated individually with appropriate amounts withdrawn from every plan, with one exception. 403b plans can be aggregated just like IRAs.

What if I am a beneficiary of an Account with RMDs?

When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner’s benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner’s death, or (2) over the life of the beneficiary starting no later than one year following the owner’s death. See the beneficiary RMD table published by the IRS in Table I.

An important clarification here is that this table gives you your starting divisor factor. Every subsequent year this divisor decreases by 1. You would not return to the chart to find the life expectancy divisor factor for next year (As you would do for Table III).

How about Roth accounts?

Roth accounts are worth some additional notice. There are typically no RMDs on Roth accounts. However, there are exceptions to this rule. If you have a Roth 401k, there will be RMDs assed on your account (Table III). This is also true if you are the beneficiary of a Roth IRA (Table I). These distributions, though required, will not be taxed. It is Roth IRAs that do not have RMDs.

* The information above is sourced from the IRS Retirement Plan and IRA Required Minimum Distributions FAQ and can be found at

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