After contributing for many years to your retirement there becomes a point when you are required to take distributions on that money saved. This article will provide you with a brief, not all-inclusive, explanation of RMDs, the type of accounts applicable, starting age and withdrawal timing and potential penalties associated with RMDs.
What is the RMD?
An RMD is the required minimum distribution that you must take from your retirement account each year after you reach a certain age. This is a minimum amount however and you are allowed to withdraw more if your plan allows it. The withdrawals you take will be included in your taxable income for that year except any part that was previously taxed or those that can be received tax-free (for example: distributions from a Roth retirement account). Planning for the tax implications of your RMD is an important aspect of retirement planning.
Applicable accounts
RMDs typically apply to tax-deferred retirement accounts such as traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b), 457(b), profit sharing plans, and other defined contribution plans. Roth IRAs do not require withdrawals until after the death of the owner and the beneficiaries of the Roth IRA are then subject to the RMD rules.
Starting Age and Withdrawal Timing
IRAs: This is the biggest area of change that you want to look out for as you are enjoying or reaching retirement! The starting age for RMDs for the longest time was 70 ½ years old, specifically from 1986-2019, and has had several changes due to the SECURE Acts.
In 2020-2022, the required age to begin taking an RMD was 72 years old. Due to another change, starting in 2023-2032 the required age to begin taking your RMDs is now 73 years old. For those that turned age 72 in 2023 (born in 1951) do not worry though, due to this change, the RMD date is April 1, 2025, rather than April 1, 2024, meaning you did not have to take an RMD in 2023! When you attain the age for an RMD, the initial withdrawal is due on April 1 of the following calendar year. To provide an example, if you turn age 73 during 2024, your first RMD withdrawal will need be taken by April 1, 2025. Your subsequent withdrawals, after your first year, will need to be taken by December 31 of each year.
Other Accounts: For owners in a workplace retirement plan, for example, 401(k), 403(b), 457(b), or profit-sharing plans, you can delay taking RMDs until you are retired. One caveat to this however is if you are a 5% owner of the business that sponsors the plan; you are then required to take RMDs.
2024: RMDs are no longer required from designated Roth accounts starting in 2024 and later years. A designated Roth account is another name for those workplace/employer sponsored plans (401k, 403b, and 457b). RMDs from designated Roth accounts in 2023 were still required, meaning if your beginning RMD withdrawal date was April 1, 2024, the RMD still should have been taken.
Calculation
The amount you will need to withdraw from your account is based on your account balance and life expectancy as defined by the IRS. The IRS does provide you with tables on this calculation.
Penalties
This is one of the biggest reasons for making sure you understand and take your RMD timely. Failing to take the required distribution can result in a severe penalty of 25% excise tax on the amount not distrusted as required. This penalty does have the ability to be waived or reduced to 10%, by establishing that the shortfall in distributions was due to reasonable error and reasonable steps have and are being taken to remedy the shortfall.
Understanding RMDs is important for effective retirement planning and to avoid unnecessary penalties. If you have more specific questions or need advice on how to handle them, please reach out to your tax advisor or wealth management advisor.
Written by Allura Taylor, Staff Accountant