Understanding Required Minimum Distribution (RMD) Rules

In Asset Allocation, Company News, General Financial Planning, Personal Financial Planning, Retirement Planning by Chip Hymiller

Required Minimum Distribution (RMD) Fast Facts:

  • Required Minimum Distributions (RMDs) are based on:
    • December 31st account values and…
    • A person’s life expectancy
  • There is currently no annual RMD requirement on Roth IRAs
  • Neglecting to take a RMD can result in a penalty of 50% on the amount of the required to be withdrawn

Required Minimum Distributions: A Deeper Look

Those who have IRAs, or 401(k) plans and are above the age of 70 may have already heard the term Required Minimum Distribution, or RMD.

People who have a tax-deferred retirement account like an IRA, Simple IRA, SEP IRA, or 401(k) plan are required to begin taking an annual distribution from these accounts at the age of 70 1/2.  These required distributions are taxable in the year they are taken.  The amount of the required minimum distribution, or RMD is based on:

  • Your account value on December 31st of the year prior to the required distribution; and
  • Your life expectancy as determined by the IRS through the Uniform Lifetime Table, which can be found in IRS Publication 590

While taxpayers can always distribute more than the IRS determined RMD, many people prefer leveraging the tax-deferred element of their IRAs for as long as possible.  Therefore, many simply take the minimum amount out each year and use other sources of income like Social Security, pensions and personal investment accounts to cover their living expenses.

Here are common questions we receive from clients regarding Required Minimum Distributions:

Are there reasons to withdraw more than the RMD from my IRA?

There are times in which it is appropriate to withdraw more than the minimum amount.  One example would include those times when a taxpayer knows that their tax rate in the next year will be higher than the current year (through the sell of a business, etc.)

Who calculates the amount of the RMD?

Most IRA custodians, or retirement plan administrators will calculate the RMD.  However, it is ultimately the taxpayer’s responsibility for calculating and initiating the withdrawal.  Beacon manages this process for clients.

About how much will my RMD be?

The actual amount of your distribution is dependent on the value of your IRA and your age.  However, as a general guideline at age 70 the calculated RMD will equate to about 3.65% of your account value.  This percentage will increase to 5.35% at age 80 and 8.77% at age 90.

Are taxes required to be withheld from RMDs?

Although there is no requirement that taxes be withheld from the distribution, many prefer having taxes withheld.

What happens if a person does not take a RMD by the deadline?

There is a stiff 50% penalty for any amount required, but not withdrawn from an account!

When I pass away will my IRA beneficiaries be required to continue taking RMDs?

Spousal beneficiaries can choose to transfer their deceased spouse’s IRA into their own name and take RMDs according to their own life expectancy.  Non-spousal IRA beneficiaries are required to take RMDs on their own calculated schedule.

Are RMDs required from Roth IRAs?

RMDs are currently not required to be taken from Roth IRAs.  However, beneficiaries of Roth IRAs are required to make minimum withdrawals each year.