You’re 72 years old and have been enjoying retirement for a few years. You diligently contributed to your 401(k) during your working years. Now you and your husband live comfortably on Social Security benefits and his pension. But there’s a new issue. The issue coming into play is the Required Minimum Distributions (RMDs). The IRS calls them Minimum Required Distributions.

What are Required Minimum Distributions (RMDs)?

RMDs are amounts a retirement account owner must withdraw annually starting at 72 years old or the year they retire (if later and the exceptions apply) (Julie Jason, 2021). RMDs aim to ensure that retirees don’t defer taxes on their retirement savings for too long.

RMDs are required from all employer-sponsored retirement plans, including 401(k)s, 403(b)s, and 457(b)s. They are also required from traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

Of particular note, RMD rules apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRA accounts while the owner is alive.

How do I Take my Required Minimum Distribution -RMDs?

How much is the RMD? The amount of the RMD is based on the account balance and life expectancy. The IRS provides life expectancy tables that account owners can use to calculate their RMD. There are multiple life expectancy tables, so be sure to use the one based on your situation (Publication 590-B (2021), Distribution from Individual Retirement Arrangements (IRAs), 2022).

IRA and 403(b) account Owners

• The IRA or 403(b) owner must calculate the RMD for each account they own but can withdraw the total amount from one account.

401(k) and other Retirement Plans

• On the other hand, other retirement plans, like owners of 401(k)s and 457(b)s, must take the RMD separately from each account in which they participate.

What if I don’t take my Required Minimum Distribution -RMD?

While the custodian or retirement plan administrator may calculate your RMD, it is vital to note that the account owner is ultimately responsible for ensuring that the correct RMD is taken. If the RMD is not taken, the amount not withdrawn will be subject to a 50% excise tax.

Other RMD rules

• You can withdraw more than the RMD amount. As the name suggests, RMD is the minimum amount you must withdraw in a particular year.
• RMD distributions cannot be rolled into another tax-deferred account.
• RMDs are taxed at the owner’s income tax rate. Of course, RMD distributions from a Roth (a special case) account are tax-free.

Conclusion

There you have it! The essential information you need to know about Required Minimum Distributions. Regarding retirement planning and IRA or 401(k) withdrawals, be sure to consider your RMDs. Contact a Certified Financial Planning Professional or a tax professional if you have any questions.

References

Julie Jason, J. L. (2021, December 15). If You Are Still Working Do You Need To Take An RMD? Retrieved from forbes.com: https://www.forbes.com/sites/juliejason/2021/12/15/if-you-are-still-working-do-you-need-to-take-an-rmd/?sh=701fa0344a11

Publication 590-B (2021), Distribution from Individual Retirement Arrangements (IRAs). (2022, August 20). Retrieved from irs.gov: https://www.irs.gov/publications/p590b#en_US_2021_publink100095124