User:Fyre4ce/Required Minimum Distribution
A Required Minimum Distribution (RMD) is an IRS-mandated withdrawal from certain types of tax-protected accounts, including Traditional IRAs, 401(k)'s, 403(b)'s, and certain Inherited IRAs. The SECURE Act of 2019 raised the age at which most RMDs become required from 70½ to 72.
The details of how RMDs affect certain types of accounts are contained in the following table:
|Traditional IRAs, SEP-IRAs, and SIMPLE IRAs||RMDs generally begin the year the owner turns 72, although if the owner turned 70½ prior to January 1, 2020, then the age 70½ rule applies.|
|Roth IRAs||Roth IRAs do not have RMDs.|
|Traditional 401(k)'s and 403(b)'s (where the account holder owns less than 5% of the employer)||RMDs begin the year when: (1) the owner turns 72 (although if the owner turned 70½ prior to January 1, 2020, then the age 70½ rule applies), or (2) the owner retires from the employer, whichever is later.|
|Roth 401(k)'s and 403(b)'s (where the account holder owns less than 5% of the employer)||RMDs begin the year when: (1) the owner turns 72 (although if the owner turned 70½ prior to January 1, 2020, then the age 70½ rule applies), or (2) the owner retires from the employer, whichever is later. However, retiring employees generally have the option to roll over Roth balances into a Roth IRA, which has no RMDs, so RMDs can be avoided this way if desired.|
|Traditional 401(k)'s and 403(b)'s (where the account holder owns more than 5% of the employer - for example, a Solo 401(k))||RMDs generally begin the year the owner turns 72, although if the owner turned 70½ prior to January 1, 2020, then the age 70½ rule applies. There is no exception for account holders who are continuing to work, so workers with these accounts affected by RMDs may choose to contribute at the same time they are taking RMDs. The net yearly contribution or withdrawal depends on whether the contribution is greater or less than the RMD.|
|Roth 401(k)'s and 403(b)'s (where the account holder owns more than 5% of the employer - for example, a Solo 401(k))||RMDs generally begin the year the owner turns 72, although if the owner turned 70½ prior to January 1, 2020, then the age 70½ rule applies. There is no exception for account holders who are continuing to work. However, account holders are generally allowed to roll Roth 401(k) and 403(b) money into a Roth IRA while still working, so RMDs can be completely avoided by performing this rollover prior to December 31st of each year contributions are made.|
|Inherited Traditional and Roth IRAs, inherited prior to January 1, 2020||The new account owner must generally take an RMD every year, regardless of their age. The RMD is calculated in the same way as for a non-inherited IRA, using the IRS Uniform Life Table, but the resulting percentage will be lower.|
|Inherited Traditional and Roth IRAs, inherited on or after January 1, 2020||Due to the SECURE Act of 2019, IRAs inherited on or after January 1, 2020 have no RMDs. However, they must be completely emptied by their new owners within ten years of being inherited. The best strategy for withdrawal (equal amounts, lump sum, etc.) will depend on the individual situation, including need for cash and tax situation.|
The amount of your RMD is equal to your retirement account balance as of December 31 of the previous year (adjusted for any outstanding rollovers, asset transfers, or conversions completed during the prior year that are recharacterized in the current one) divided by your life expectancy factor according to the IRS Uniform Lifetime Table.
|Age||IRS Uniform Life Table||Percentage|
Combining distributions from multiple accounts
A distribution from one retirement account can be used to satisfy the RMD from a different account, but certain restrictions apply.
- The IRA cannot be an inherited IRA
- An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs.
- 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.
Interaction with Roth conversions
For each calendar year you are required to take a RMD, the RMD must be the first money to leave the account(s). For example, if you wanted to perform a Roth conversion from a traditional IRA account in a calendar year that also has a RMD, the RMD must be completed before you perform a subsequent Roth conversion. If you reverse this sequence, the IRS will consider you to have improperly contributed RMD funds into the Roth account. This twist can cause particular problems for the year you turn 72, since you have until April 1 of the following year to complete the RMD, but can't perform a Roth conversion until the RMD is completed.[note 1]
Generally, those affected by RMDs are allowed to defer their first RMD until April 1 of the following year. But be aware that if you delay your first RMD, you will end up taking (and being taxed on) two RMDs that year. Thus delaying your initial RMD may needlessly push you up into a higher tax bracket.
Qualified Charitable Distributions
Qualified Charitable Distributions (QCDs) allow IRA owners to satisfy part or all of their RMD by giving money directly to a qualifying non-profit organization. QCDs are limited to $100,000, although for married joint filers, this limit applies separately to each spouse.
The penalties for failing to take a RMD are large: 50% of the balance that should have been distributed. For this reason, correctly calculating and taking RMDs should be a top financial priority for those affected.
Required Minimum Distributions versus annuitization
The distribution rules were made more generous in recent years and appear to work better than many annuities. If only the IRS Required Minimum Distribution (RMDS) percentage (See IRA distribution tables) is taken in bull or bear market years, the amount of money withdrawn will be increased some years and reduced some years but will theoretically never run out. Of course a severe long term decline like the Japanese scenario might make the amount of money insufficient to support required retirement expenses. Portfolio allocations for retirees dependent upon investments for a significant portion of their living expenses should be conservative anyway (higher percentage of fixed income reducing the equity risk).
Assuming the portfolio grows in value 6%/year (The default value in the Vanguard planner), the portfolio grows 19.5% in value after the distributions for the first 13 years. If the recipient is lucky enough to live to 100 years, the portfolio would have lost 37% of its initial value.
Since the distribution is based upon the recipient’s life expectancy, it increases each year as the life expectancy decreases. For example the distribution for the first year is based upon a life expectancy of 27.4 years. If one makes it to 100 years old the distribution is based upon a life expectancy of 6.3 years. This means the distribution income doubles after 13 years and peaks at 288% of the initial distribution value when one reaches 96 years of age. It is still 270% of the initial distribution value if one reaches 100 years of age.
Distribution from the IRA only means that taxes are due. After taxes are paid, if some portion of the distribution is not required for living expenses, it can be reinvested outside the IRA.
A final important consideration is that a surviving spouse can roll an IRA account from a deceased spouse directly into his or her own IRA account. Of course any amount remaining after both spouses are dead goes into the estate unless the spousal IRA has designated beneficiaries and is timely rolled over into inherited IRAs for the beneficiaries or distributed to a charitable beneficiary. Many forms of annuity only guarantee payment while the recipient is living.
- See the article Age 70½ Confusion for Retirement Accounts for an excellent discussion, with illustrative examples, of how RMDs can interact with Roth conversions, rollovers and direct trustee transfers.
- How to Take Required Distributions, Natalie Choate, August 15, 2015.
- IRS Pub 590-B (2014), Distributions from Individual Retirement Arrangements (IRAs), Miscellaneous Rules for Required Minimum Distributions, viewed August 15, 2015.
- Retirement Plans FAQs regarding Required Minimum Distributions, IRS, viewed August 15, 2015.
- Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), (PDF)
- Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), (PDF)
- Retirement Plans FAQs regarding the Required Minimum Distributions, from the IRS
- Russell, Megan, Roth Conversion: Take Your Required Minimum Distribution Out First, Marotta Wealth Management, (June 26, 1916)
- Required Minimum Distribution Calculators