User:Fyre4ce/Required Minimum Distribution

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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.

Affected accounts

The details of how RMDs affect certain types of accounts are contained in the following table. Following the passage of the SECURE Act, "RMD age" is 72, except that it is 70½ for investors who turned 70½ prior to January 1, 2020. The IRS defines age 70½ as six months after the investor's 70th birthday.

Type of Account Situation RMDs[1] and Comments
Traditional IRA, SEP-IRA, or SIMPLE IRA Non-inherited, or inherited by a spouse who elects to treat the IRA as their own RMDs begin the year the owner reaches RMD age. Surviving spouses who elect to treat a deceased spouse's IRA as their own are required to take the decedent spouse's RMD (if any) the year they inherit it.
Roth IRA Roth IRAs do not have RMDs.
Traditional 401(k), 403(b), or 457(b) Account holder owns less than 5% of the employer RMDs begin the year when: (1) the owner reaches RMD age, or (2) the owner retires from the employer (if the plan permits), whichever is later.
Roth 401(k), 403(b), or 457(b) RMDs begin the year when: (1) the owner reaches RMD age, or (2) the owner retires from the employer (if the plan permits), 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), 403(b), or 457(b) Account holder owns more than 5% of the employer (eg. Solo 401(k)) RMDs begin the year the owner reaches RMD age. 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), 403(b), or 457(b) RMDs begin the year the owner reaches RMD age. 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 or Roth IRA Inherited prior to January 1, 2020, or if the new owner is (1) the surviving spouse electing not to treat the IRA as their own, (2) a minor child of the decedent, until they reach the age of majority, (3) not more than ten years younger than the decedent, (4) chronically ill, or (5) permanently disabled.[2] The beneficiary must take an RMD every year, regardless of their age, beginning the year after they inherit the IRA. The RMD is calculated using the IRS Single Life Expectancy Table, but the resulting percentage will usually be lower than for retirees; see RMD calculation below. The year the owner dies, a RMD is determined and calculated as though the owner were alive the entire year. If the owner needed to take an RMD and did not take the full amount while they were alive, the beneficiary is responsible for taking any remaining RMD.
Inherited on or after January 1, 2020, and none of the above exceptions apply Due to the SECURE Act, IRAs inherited on or after January 1, 2020, and to which the exceptions don't apply, have no RMDs. However, they must be completely emptied by their beneficiary by the end of the tenth year following the death of the owner. For IRAs inherited by a minor child of the decedent, the ten-year clock begins when the child reaches the age of majority. The best strategy for withdrawal (equal amounts, lump sum, etc.) will depend on the individual situation, including need for cash and tax situation.

Calculation

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 appropriate IRA distribution table in IRS Publication 590-B. Calculations for different scenarios are described below.

Self-owned accounts

RMDs for self-owned accounts begin according to the table above, and are calculated according to either Table III or Table II.

Table III (Uniform Lifetime) is for use by:

  • Unmarried Owners,
  • Married Owners Whose Spouses Are Not More Than 10 Years Younger, and
  • Married Owners Whose Spouses Are Not the Sole Beneficiaries of Their IRAs.

Also use this table if you are a spouse who chooses to roll an IRA over to your own IRA (treat as your own) after the death of a spouse.[note 1]

Table II (Joint Life and Last Survivor Expectancy) is for use by owners whose spouses are more than 10 years younger and are the sole beneficiaries of their IRAs. If you are married and there is an age differential of 10 years or more between spouses, use these joint-life tables for determining the RMD of the plan owner. (See Publication 590-B.)


Table III (Uniform Lifetime)
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Age Life expectancy Withdrawal Rate
70 27.4 3.65%
71 26.5 3.77%
72 25.6 3.91%
73 24.7 4.05%
74 23.8 4.20%
75 22.9 4.37%
76 22.0 4.55%
77 21.2 4.72%
78 20.3 4.93%
79 19.5 5.13%
80 18.7 5.35%
81 17.9 5.59%
82 17.1 5.85%
83 16.3 6.13%
84 15.5 6.45%
85 14.8 6.76%
86 14.1 7.09%
87 13.4 7.46%
88 12.7 7.87%
89 12.0 8.33%
90 11.4 8.77%
91 10.8 9.26%
92 10.2 9.80%
93 9.6 10.42%
94 9.1 10.99%
95 8.6 11.63%
96 8.1 12.35%
97 7.6 13.16%
98 7.1 14.58%
99 6.7 14.93%
100 6.3 15.87%
101 5.9 16.95%
102 5.5 18.18%
103 5.2 19.23%
104 4.9 20.41%
105 4.5 22.22%
106 4.2 23.81%
107 3.9 25.64%
108 3.7 27.03%
109 3.4 29.41%
110 3.1 32.26%
111 2.9 34.48%
112 2.6 38.46%
113 2.4 41.67%
114 2.1 47.62%
115 + 1.9 52.63%
Table II (Joint Life and Last Survivor Expectancy)


(View Google Spreadsheet in browser, then File --> Download as to download the file.)
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First RMD

Those affected by RMDs are allowed to defer their first RMD until April 1 of the following year[3]. This date is referred to as the required beginning date (RBD). 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.

Example

A taxpayer turns 72 in March of 2020. The combined balance of all non-inherited Traditional, SEP, and SIMPLE IRAs on December 31, 2019 was $882,349. He is married, and his spouse is less than 10 years younger. The IRS Table III Uniform RMD Table shows a Life expectancy factor of 25.6 at age 72, and the RMD is calculated as:

RMD = $882,349 / 25.6 = $34,467

Year of owner's death

A RMD is required in the year of the account owner's death as though they were alive for the entire year. If the owner had not reached their required beginning date when they died, then no RMD is required the year of their death, even if the owner had already reached RMD age. If the owner died on or after their required beginning date, then their beneficiary is required to take the RMD from the account as though the owner were still alive, calculated using either Table III or Table II as appropriate. This requirement also applies to surviving spouses who elect to treat the account as their own.

If the owner died late in the year and did not take their RMD, then it may be difficult for the beneficiary to take the RMD before December 31st. If you are the beneficiary and missed the RMD deadline, take the appropriate RMD as soon as practical, not combined with any other withdrawals (and separate distributions if making multiple years of RMDs) to make it as clear as possible, and file your tax return with no penalty and a request for a waiver.[4]

Beneficiaries

Beneficiaries use either Table I to calculate RMDs, or the ten-year rule for IRAs inherited on or after January 1, 2020 and to which the listed exceptions do not apply.

Table I (Single Life Expectancy For Beneficiaries)
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Age Life expectancy Withdrawal Rate
0 82.4 1.21%
1 81.6 1.23%
2 80.6 1.24%
3 79.7 1.25%
4 78.7 1.27%
5 77.7 1.29%
6 76.7 1.30%
7 75.8 1.32%
8 74.8 1.34%
9 73.8 1.36%
10 72.8 1.37%
11 71.8 1.39%
12 70.8 1.41%
13 69.9 1.43%
14 68.9 1.45%
15 67.9 1.47%
16 66.9 1.49%
17 66.0 1.52%
18 65.0 1.54%
19 64.0 1.56%
20 63.0 1.59%
21 62.1 1.61%
22 61.1 1.64%
23 60.1 1.66%
24 59.1 1.69%
25 58.2 1.72%
26 57.2 1.75%
27 56.2 1.78%
28 55.3 1.81%
29 54.3 1.84%
30 53.3 1.88%
31 52.4 1.91%
32 51.4 1.95%
33 50.4 1.98%
34 49.4 2.02%
35 48.5 2.06%
36 47.5 2.11%
37 46.5 2.15%
38 45.6 2.19%
39 44.6 2.24%
40 43.6 2.29%
41 42.7 2.34%
42 41.7 2.40%
43 40.7 2.46%
44 39.8 2.51%
45 38.8 2.58%
46 37.9 2.64%
47 37.0 2.70%
48 36.0 2.78%
49 35.1 2.85%
50 34.2 2.92%
51 33.3 3.00%
52 32.3 3.10%
53 31.4 3.18%
54 30.5 3.28%
55 29.6 3.38%
56 28.7 3.48%
57 27.9 3.58%
58 27.0 3.70%
59 26.1 3.83%
60 25.2 3.97%
61 24.4 4.10%
62 23.5 4.26%
63 22.7 4.41%
64 21.8 4.59%
65 21.0 4.76%
66 20.2 4.95%
67 19.4 5.15%
68 18.6 5.38%
69 17.8 5.62%
70 17.0 5.88%
71 16.3 6.13%
72 15.5 6.45%
73 14.8 6.76%
74 14.1 7.09%
75 13.4 7.46%
76 12.7 7.87%
77 12.1 8.26%
78 11.4 8.77%
79 10.8 9.26%
80 10.2 9.80%
81 9.7 10.31%
82 9.1 10.99%
83 8.6 11.63%
84 8.1 12.35%
85 7.6 13.16%
86 7.1 14.08%
87 6.7 14.93%
88 6.3 15.87%
89 5.9 16.95%
90 5.5 18.18%
91 5.2 19.23%
92 4.9 20.41%
93 4.6 21.74%
94 4.3 23.26%
95 4.1 24.39%
96 3.8 26.32%
97 3.6 27.78%
98 3.4 29.41%
99 3.1 32.26%
100 2.9 34.48%
101 2.7 37.04%
102 2.5 40.00%
103 2.3 43.48%
104 2.1 47.62%
105 1.9 52.63%
106 1.7 58.82%
107 1.5 66.67%
108 1.4 71.43%
109 1.2 83.33%
110 1.1 90.91%
111 1.0 100.00%

Details

RMDs have much in common with any other withdrawal from a tax-advantaged account (eg. withdrawals from a Traditional IRA with non-deductible basis are pro-rata). However, RMDs have several special properties:

  • RMDs cannot be rolled back into tax-advantaged accounts, although they can be reinvested in the same or similar investments inside a taxable account.
  • Withdrawals of more than the RMD amount in a given year do not carry forward to help satisfy RMDs in future years, although they will reduce the balance on which future RMDs are calculated.
  • RMDs are exempt from early withdrawal penalties, in the case of an Inherited IRA. Although not technically RMDs, withdrawals from an Inherited IRA subject to the ten-year rule are also exempt from early withdrawal penalties.

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[5]
  • 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.[3]
  • 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.

However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts.[3]

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 2]

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.

Penalties

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. Penalties for not taking a sufficient RMD and/or taking a late RMD are assessed using IRS Form 5329.

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.

Notes

  1. If you are the surviving spouse who is the sole beneficiary of your deceased spouse's IRA, you may elect to be treated as the owner and not as the beneficiary. See: Publication 590 (IRA Beneficiaries)
  2. 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.

See also

References

External links