Client Login

Understanding Required Minimum Distributions (RMDs)

Jan 27, 2022 | Life Events, Retirement

Required Minimum Distributions (RMDs) are an important part of your financial landscape in retirement. Most people must start taking RMDs from qualified retirement accounts at age 72 (previously 70 ½). Here’s what you need to know about RMDs: what RMDs are, accounts subject to RMDs, important deadlines, and more. Understanding RMDs will help avoid penalties and optimize your distributions for tax purposes.

What Are RMDs?

RMD stands for Required Minimum Distribution. This is the annual amount that eligible individuals must withdraw from each of their qualified retirement accounts.

Who Must Take RMDs?

Under the SECURE Act, new RMD rules were implemented in 2020. Now, most people must take an RMD from their qualified retirement accounts once they turn 72, and every year thereafter.  In some cases, you can delay RMDs until after you retire. You can also defer your initial RMD.

There are special rules if you inherit a retirement account, depending on your relationship to the original account holder, the decedent’s date of death, the type of retirement account, and more.

Why Must I Take an RMD?

Contributions to tax deferred qualified retirement accounts allow you to defer taxes on that portion of your income and savings until retirement age.  An RMD acts to ensure that you eventually pay taxes on your prior year earnings.  RMDs spread the balance of your qualified retirement account across your lifetime, ensuring that you enjoy the wealth you’ve accumulated, rather than leave it as a legacy.

Which Retirement Accounts Require RMDs?

The following accounts are subject to RMD rules:

  • Traditional IRAs
  • Simplified Employee Pension IRAs (SEPs)
  • Qualified pension plans
  • Qualified stock bonus plans
  • Qualified profit-sharing plans (including 401(k) plans)
  • Section 457(b) and Section 403(b) plans

Your plan administrator or tax professional can advise whether RMD rules apply to your employer-sponsored plan.

You don’t need to take RMDs from Roth IRA(s) during your lifetime, but your beneficiaries may have to take distributions.

RMDs are calculated per account, but can be withdrawn as an aggregate from only one account if you wish.

Calculating Your RMD

For most taxpayers, the RMD calculation is fairly simple. You divide your account balance on December 31 of the previous calendar year by your distribution factor, which is obtained from the IRS Uniform Lifetime Table, using the age on your birthday during the calendar year of distribution.

If your sole beneficiary is a spouse who’s more than 10 years younger than you, you may base your RMD on joint and survivor life expectancy, which affords a longer payout period.

Are RMDs Taxable?

RMDs produce taxable income, taxed at ordinary income tax rates, even if the funds represent long-term capital gain or qualifying dividends from stock held in a plan. That said, any after-tax contributions you made may not be subject to tax, simply because those dollars were already taxed.

Special tax rules apply to Roth IRA and Roth 401(k)/403(b) contributions, as well as capital gain treatment on distributions from retirement plans.

Can I Withdraw More than My RMD?

You can withdraw more than your RMD, but higher withdrawals deplete your retirement nest egg more quickly, and may increase your tax burden.

What If I Don’t Take My RMD?

Failing to take your full RMD, or taking it late, triggers a tax penalty, assessed as 50% of the difference between the RMD you should have  taken, less any distributions you took. Report and pay this penalty on your Federal income tax return the calendar year the shortfall occurred. The IRS may waive the penalty in certain circumstances.

When Must I Take My RMD?

Your first RMD is typically due the year that you reach age 72. In the case of your first RMD only, you can withdraw it:

  • The year in which RMD rules first apply to you.
  • Delay it, taking it no later than April 1 of the year following. This is your ‘Required Beginning Date.’

All subsequent RMDs must be taken by December 31 of each calendar year, until your balance reaches zero or until your death.

If you’re still working past the year in which your RMDs must commence, and you participate in your employer’s retirement plan, your Required Beginning Date can be deferred to April 1 following the calendar year of your retirement (but only if the retirement plan allows this and you own no more than 5% of the company). Subsequent distributions must still be taken by December 31 annually.

Should I Delay My First RMD?

If you delay your first RMD, you’ll have to take two distributions in one year: your first year’s deferred RMD (by April 1), plus your second year’s RMD (by December 31). A ‘double distribution’ increases your annual taxable income, potentially impacting your Federal and state income taxes. You may also lose certain tax exemptions and deductions. However, it may be advantageous to defer e.g., if you expect to be in a lower income tax bracket the following year.

RMDs and Annuities

Purchasing an annuity contract with qualified retirement assets may satisfy RMD requirements if ALL of the following are true:

  • Payments are made at least yearly
  • You purchase the annuity on or before the date that your RMDs should begin
  • The annuity is calculated and paid during a time period equal or less than that of the RMD rules
  • Payments, with certain exceptions, are non-increasing

Gifting of RMDs

If you’re financially secure enough that you don’t need your RMD income once RMD rules apply to you, you might wish to consider gifting some or all of your RMD to charities.  Such gifts are known as Qualified Charitable Distributions (QCDs).

QCDs reduce the amount of taxable income you must report.  For example, if your RMD for the current year is $60,000 and you distribute $20,000 from your IRA to charities as QCDs, you’re only taxed on the remaining distribution that you must receive, which is $40,000.  QCDs cannot be included as itemized deductions as they act to reduce your taxable income.

Requirements for QCDs include:

  • The annual limit for QCDs is $100,000, per person
  • A QCD can exceed your RMD amount for the year as long as it does not exceed the $100,000 annual limit. However, that extra distribution can’t be carried over to meet the RMDs for future years.
  • If you want to do a QCD, you must make a direct IRA transfer from the IRA to the charity.
  • All QCDs must be distributed from your retirement account by December 31st in order to count against your current year RMD

Inherited IRAs

Please note that different rules apply to inherited IRAs.  Please consult with us or your tax preparer to determine appropriate rules for any required distributions from such accounts.

As with all financial decisions, proper planning is essential when it comes to your Required Minimum Distributions. Professional advice is recommended, especially if you’re considering advanced tax planning strategies. We can work with you, your tax professional, and/or your estate planning attorney, to ensure tax-efficient distribution of your RMD. Please contact us to arrange a consultation.


Prepared by SageVest Wealth Management. Copyright .
Standard Disclosure

The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This article is for informational purposes only. The views expressed are those of SageVest Wealth Management and should not be construed as investment advice. All expressions of opinions are subject to change and past performance is no guarantee of future results. SageVest Wealth Management does not render legal, tax, or accounting services. Accordingly, you, your attorneys and your accountants are ultimately responsible for determining the legal, tax and accounting consequences of any suggestions offered herein.

In accordance with IRS CIRCULAR 230, we inform you that any U.S. Federal tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used by a taxpayer, for the purpose of (a) avoiding penalties under the Internal Revenue Code or that may otherwise be imposed on the taxpayer by any government taxing authority or agency, or (b) promoting, marketing or recommending to another party any transaction or matter addressed herein.

The provision of a link to any third party website does not mean that SageVest endorses that website. If you visit any website via a link provided here, you do so at your own risk and indemnify SageVest from any loss or damage incurred.

Make a wise investment in your future today.