Required Minimum Distributions: 12 Common RMD Questions and Answers

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If you are a retiree or close to retirement you most likely have questions about Required Minimum Distributions (RMDs). Once you reach a certain age, you must start making withdrawals from your traditional retirement savings plan to avoid tax penalties.

Here is a list of 12 common RMD questions and answers to help you prepare:

1. What are RMDs?

Required Minimum Distributions (RMDs) are minimum amounts that you must withdraw annually from your traditional IRA, 401(k), 403(b), or other retirement savings plan once you’ve reached the mandatory age for making withdrawals.

2. When are RMDs required?

The mandatory age at which you must begin taking RMDs from your traditional IRA depends on when you were born. The Setting Every Community Up for Retirement Enhancement (SECURE Act 2.0) raised the age for RMDs from 72 to 73 for individuals who turned 70 ½ after December 31, 2019. As a result:

• • • If you were born before July 1, 1949, you must begin taking RMDs by April 1 of the year following the year you turn 70 ½. As noted above, the CARES Act suspended RMDs for 2020. However, RMDs for 2021 must be taken by April 1, 2023.
    • If you were born after July 1, 1949, you must begin taking RMDs by April 1 of the year following the year that you turn age 73.
    • For each subsequent year after you begin taking RMDs, you must withdraw your RMD by December 31.
    • Note that the amounts you withdraw typically count as taxable income unless you already paid taxes on your contributions^[1]https://www.finra.org/investors/learn-to-invest/types-investments/retirement/rmds-questions-about-ira-accounts.

3. How are RMD’s Calculated?

For traditional IRAs, individuals are directly responsible for computing required minimum distributions. Because of the complex nature of RMD rules, we highly recommend you consult with a tax professional.

The RMD for any given year is the total account balance in your traditional IRA, or IRAs, as of the end of the immediately preceding calendar year divided by a distribution period. You can find the distribution period using the IRS’s Joint Life and Last Survivor Expectancy Worksheet if your spouse is the sole beneficiary and is more than 10 years younger than you, or the Uniform Lifetime Worksheet for all other IRA owners.

Note: RMDs are calculated using the life expectancy tables issued by the IRS in Publication 590-B. Updates to the life expectancy tables will go into effect on January 1, 2023. Check the IRS website for updates.

4. What if I don’t take any distributions, or if I don’t take enough?

Not taking the appropriate distributions may cause you to have to pay a fifty percent excise tax on the amount not distributed.

5. Can I withdraw more than the minimum required amount?

Yes, you can, but be aware that the amount of your RMD, as well as any amount that exceeds the RMD, will be considered taxable income except for any part that was taxed before or that can be received tax-free (such as qualified distributions from designated Roth accounts).

Note: If you take more than the minimum amount, you can not apply the excess RMD distribution for one year to a future year.

6. Do I have to take my RMD separately from each account or can I take it all from one account?

If you are a traditional IRA owner, you must calculate the RMD separately for each traditional IRA that you own but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns but can take the total amount from one or more of the 403(b) contracts. RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, must be taken separately from each of those plan accounts.

7. Do ROTH IRAs require RMDs?

Roth IRAs do not require RMD withdrawals until after the death of the owner.  If you have a Roth account in an employer-sponsored plan, the IRS recommends that you contact your plan sponsor or plan administrator regarding RMD information.

8. What is the 10-year rule?

The 10-year rule requires non-spousal IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year of the 10th anniversary of the owner’s death.

Whether a beneficiary of an account holder is subject to the annual RMD distribution rule depends on whether the account holder died before or after her required beginning date (RBD).

Application of the 10-year rule for successor beneficiaries depends on two factors: Did the IRA owner or plan participant die before or after her required beginning date (RBD)? And was the original beneficiary an eligible designated beneficiary (EDB)?

When the IRA owner or plan participant dies before the RBD, or when a Roth IRA owner dies at any age, there are no annual RMDs under the 10-year rule.

Example: Carlos, age 85, dies in 2022, and his traditional IRA beneficiary is his adult son Daniel. Carlos died after his RBD. Therefore, Daniel is subject to the 10-year rule and must take annual RMDs over his life expectancy starting in 2023. Daniel names his daughter Eva as successor beneficiary.

9. What if the retirement plan account owner or IRA owner dies before RMDs have begun?

This answer depends on when you inherited the IRA. Generally, for any individual who inherited an IRA from an owner who passed away by December 31, 2019, or before, 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. However, for account owners who pass away after December 31, 2019, the SECURE Act requires the entire balance of the account to be distributed within 10 years.

There are exceptions for a surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill person, or a person not more than ten years younger than the original account owner (such as a friend or sibling). The 10-year distribution rule applies regardless of whether the participant dies before (or after) the required beginning date for RMDs, which is now 72 for those who did not turn 70½ in, or prior to, year-end 2019.

See the IRS Required Minimum Distributions for Beneficiaries chart and IRS Publication 590-B, for complete details on when beneficiaries must start receiving RMDs and use the Single Life Expectancy Table found in the publication to compute the amount owed.

10. Do annuities require RMD’s?

This answer depends on the type of annuity you own. If you own a variable annuity, and it is held in an IRA, the answer is yes. This is referred to as a “qualified annuity” by the IRS, meaning that it likely was funded with pre-tax money that requires you to pay taxes on your withdrawals, as well as take RMDs.  Non-qualified annuity contracts offer tax-deferred growth of after-tax funds; they are taxed when annuitized, but as a general rule are not subject to RMDs. (For tax treatment of qualifying longevity annuity contracts (QLACs), see the IRS’s Form 1098-Q info page.)

11. What are my brokerage firm’s reporting obligations for RMDs?

The IRS requires brokerage firms and other financial institutions that are custodians or trustees of traditional IRAs to either calculate or offer to calculate the RMD for IRA owners and to report this information to the IRS. Firms that serve as administrators to employer-sponsored retirement plans typically have the same responsibility for plan participant RMDs. But mistakes can be made, and investors should carefully double-check any firm’s RMD computation using the IRS’s RMD worksheets. Tools such as FINRA’s RMD Calculator can also be helpful, as can the assistance of a tax professional.

One thing the IRS makes very clear is that RMD calculations are ultimately the taxpayer’s responsibility, so don’t rely blindly on calculations by your IRA custodian or retirement plan administrator.

12. What if a mistake is made when calculating or taking my RMDs?

Don’t worry, all is not lost if you make a mistake on your RMD calculations makes a mistake. In one of its FAQs, the IRS states that penalties “may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall.” In order to qualify for this relief, you must file Form 5329 and attach a letter of explanation.

We hope this article takes some of the stress out of your RMDs. Retirement is complicated, and peace of mind in retirement requires a plan. Schedule an appointment with us today to get started and feel confident about your future. 

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RMD RESOURCE CHEAT SHEET:

FINRA and the IRS are great resources that provide important taxpayer information about RMDs.

• • Frequently Asked Questions: FAQs
  • A chart highlighting basic RMD rules for IRAs and defined contribution plans, plus and resources to help you accurately compute your annual RMDs.
  • A beneficiary distributions chart and the correction of miscalculations or missed RMD obligations.
  • According to the IRS, if you have a 401(k) or another employer-sponsored plan, including the federal government’s Thrift Savings Plan, your plan sponsor or administrator should calculate the RMD for you.
  • Investors should carefully double-check any firm’s RMD computation using the IRS’s RMD worksheets.
  • IRS Required Minimum Distributions for Beneficiaries chart
  • FINRA’s RMD Calculator
  • Read More About RMD’s and 10 Common Questions and Answers

What to hear more about this topic? Listen to our episode of Beacon Retirement Strategies: The Key to Managing Required Minimum Distributions and Saving Money in Retirement.