Some retirement plans and accounts have a required minimum distribution (RMD), which is an amount that must be withdrawn.
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What’s a required minimum distribution (RMD)?
A required minimum distribution (RMD) is a mandatory withdrawal that you take out of specific retirement accounts after you turn 72.
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It used to be required when you turn 70½. However, the SECURE Act, which was passed on December 20, 2019, changed the first RMD to be withdrawn by April 1 of the year after you turn 72.
After your first RMD, you’ll be required to take it by December 31 of every year. Keep in mind that if you wait until April 1 to take your first RMD, you’ll have to take the first and second in the same year.
It’s required by the IRS, and the types of retirement accounts that are subject to it are as follows:
- Traditional IRA.
- SEP IRA.
- SIMPLE IRA.
- 401(k) plans.
- 403(b) plans.
- 457(b) plans.
- Profit sharing plans.
- Other defined contribution plans.
Remember, taking your RMD is mandatory. If you don’t make the withdrawal or take the full amount, you’re subject to an IRS penalty, which is up to 50% of the amount that wasn’t withdrawn.
Calculating your RMD
Before calculating your RMD, take a look at the IRS website to make sure you’re using the most recent calculation requirements.
Then, figure out the type of retirement account that you have. The main factor to consider is whether you’re the original owner of the IRA or if you inherited it.
If you’re the owner of the IRA, divide your account balance at the end of the prior year by your life expectancy factor, which is defined by the IRS Uniform Lifetime Table (PDF).
For example, say you’re 76 years old, and your account balance in your traditional IRA was $500,000 as of December 31 of the previous year. According to the Uniform Lifetime Table, your life expectancy factor is 22. Then, divide 500,000 by 22, which gives you $22,727.27. This is your RMD.
The calculation is straightforward. However, the only exception to using the IRS Uniform Lifetime Table is if your spouse is the sole beneficiary and is more than 10 years younger than you.
If your spouse is less than 10 years younger than you, stick to the Uniform Lifetime Table.
If your spouse is more than 10 years younger than you, use the Joint Life Expectancy Table. The calculation method is the same, as the only difference is the life expectancy factor because it considers your spouse’s age.
For example, say your year-end account balance was $300,000, you’re 75, and your spouse is 60. According to the Joint Life Expectancy Table, the life expectancy factor is 26.5. Take 300,000 and divide it by 26.5. That gives you your RMD, which is $11,320.75.
If you inherited an IRA, the steps you need to take depend on your relationship with the original IRA owner.
An option you have is to withdraw the entire amount without a penalty. However, there can be tax implications.
Since it can vary and taxes come into play, it’s important to check with the IRS website, a tax professional, or a financial advisor.
When you’re ready to take your RMD, contact the financial institution where your retirement accounts are held. They’ll be able to process the RMD for you.
Frequently asked questions
When you calculate your RMD, you must do it separately for each IRA. The amount that you come up with can come out of one or more IRAs.
Since you’re being taxed on the total RMD, there’s no benefit of taking it annually or monthly.
No, Roth IRAs don’t have RMDs. If you inherit a Roth IRA, you may need to take a required minimum distribution to avoid penalties. Be sure to check with a financial advisor or tax professional.
Yes, you can take out more than the RMD without an IRS penalty. The only factor to keep in mind is that the entire amount is taxable.
The IRS requires you to make a withdrawal from traditional IRAs or employer-sponsored plans. It’s called a required minimum distribution (RMD). The amount depends on your age and other factors. Remember, there aren’t any penalties for taking it out, and it’s taxed as ordinary income.
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About David Em
David Em is the founder of More Money More Choices, which he launched to help you take control of your finances and build your dream life. Before More Money More Choices, David worked in leadership positions in the finance industry.