RMDs: What you should know

An RMD (required minimum distribution) is a required minimum amount that must be withdrawn from a retirement account once the owner reaches age 70 ½. Though the IRS (Internal Revenue Service) requires a minimum, you can always take more if you choose. These distributions will be included as taxable income unless the taxes were paid on the contributions, in that case it would be considered tax-free. These types of accounts may require RMDs:

  • Traditional IRA
  • 403(b)
  • 457(b)
  • 401(k)
  • Roth 401(K)
  • Other defined contribution plan
  • Profit sharing plans
  • All employer-sponsored plans

Roth IRA participants are not required to RMDs while the owner is living. Click here to learn about different types of IRA’s.


How is it calculated?

To calculate RMDs, the total account balance at the end of the previous calendar year is divided by the distribution period on the IRS’ Uniform Life Table. If multiple IRAs are owned by the same person, it is not required to take a distribution from each account. Instead, the RMD can be calculated for each individual account added together. The total can then be drawn from any single account. However, this doesn’t apply to every retirement account.


What happens if the owner dies?

In the event of the account owner’s death, the RMD is dependent upon the beneficiary’s identity.

A spouse can act as if they are the owner of the account and base the RMDs off his or her own age. If the account owner dies before the required distribution period began, the spouse can withdrawal the entire balance within 5 years of the death or wait until the owner would have turned age 70 ½ to begin receiving RMDs.

To see further details about other beneficiaries, click here.


Is there a penalty if RMDs are not withdrawn?

If an account owner fails to withdrawal RMDs, there could be a tax penalty of up to 50 percent of the amount that should have been distributed. If this happens, a Form 5329 should be filled out with an explanation as to why the distributions did not occur. In some circumstances, the penalty can be waived if reasonable.


Is there an easier way?

Most investment firms now allow you to automate your RMDs.  At the beginning of the year, your RMD is automatically calculated and that amount can be distributed in a couple of different ways:  It can be deposited into a separate taxable investment account, electronically sent to a checking or savings account, or sent to you the old fashioned way via check to your home of record. You simply fill out the proper form one time and your RMDs are taken care of going forward.

In most cases, you can decide which month and day to receive your payment or you can split up the payment into monthly installments similar to Social Security or a pension. The best part is the required federal and state taxes can automatically be withheld so you don’t get a surprise when you file your taxes.

This can be a very important option as you become older.  If you enter an assisted care facility or nursing home, in may be difficult to fill out the paperwork annually to insure your RMDs are paid, particularly if you have cognitive issues.  In that case, it would require someone with a power of attorney to fill the paperwork out for you on an annual basis. 

Automating your RMDs is a sensible way to prevent possible issues in the future and avoid the dreaded 50% tax for not taking it by the required date.