Some of the most common questions we receive are on the topic of Required Minimum Distributions (RMDs). This guide provides a quick overview of RMDs and answers frequently asked questions to help you navigate this important aspect of retirement planning.
What is a Required Minimum Distribution (RMD)?
A Required Minimum Distribution (RMD) is the minimum annual amount the IRS requires you to withdraw from your tax-deferred retirement accounts once you reach a certain age. RMD rules apply to accounts like traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, 457(b)s and similar plans funded with pre-tax contributions. This withdrawal is essentially the government’s way of collecting taxes on the years of tax-deferred growth your retirement savings have enjoyed.
At what age do I start my RMD?
The Secure Act 2.0 passed in December 2022 raised the age for RMDs from 70.5 years of age to 73. In 2033, the RMD age will increase to age 75. You may calculate when you must begin taking your RMD based on your birth date.
Year of Birth RMD’s Must Begin By Age
1951-1959 73
1960 or later 75
What is the deadline for RMDs?
The standard deadline for all RMDs is December 31. The year you turn 73 you have a one-time option to delay your very first RMD until April 1 of the following year. However, keep in mind that if you delay until the following year you will need to take two RMDs in the same year, which could potentially push you into a higher tax bracket.
How are RMDs calculated?
The IRS provides life expectancy tables to help determine the amount you must withdraw each year. The calculation is based on two factors:
- Account Balance: The total balance of your retirement accounts on December 31 of the previous year.
- Life Expectancy Factor: A factor provided by the IRS, which is based on your age.
To determine your RMD, simply divide your account balance by the corresponding life expectancy factor. The IRS publishes the calculation formula and life expectancy tables on its website https://www.irs.gov. An EBS Wealth Management professional can help calculate your RMD.
Can you withdraw more than the RMD?
Yes, you can always withdraw more than the required minimum.
How are RMDs taxed?
Generally, the amount you withdraw is taxed as ordinary income at your current federal and state tax rates. However, if you made non-deductible after tax contributions to an IRA, for example, the portion of your RMD that represents return on the after tax contribution may not be taxable.
What is the penalty for not taking an RMD?
The penalty for failing to take your full RMD on time is an excise tax of 25% of the amount you should have withdrawn. This penalty can be reduced to 10% if you correct the missed RMD within a two-year period. In some cases, the IRS may waive the penalty if you can show the failure was due to a “reasonable error” and you are taking steps to fix it.
Do Roth IRAs have RMDs?
No. Since contributions to Roth IRAs are made with after-tax money, the government has already collected its taxes, and there is no mandatory withdrawal requirement for the original account holder.
What if I have multiple accounts?
The rules depend on the type of account:
- IRAs: You must calculate the RMD for each of your traditional IRAs separately, but you can withdraw the total combined RMD amount from any one or a combination of your IRA accounts.
- 401(k)s & 457(b)s: The RMD for a 401(k) or 457(b) must be calculated and taken from that specific account. You cannot aggregate your 401(k) or 457(b) RMDs and take them from a single account.
After I take my RMD, can I just put the money back into my retirement account?
No. Once the money is withdrawn as a RMD, it is no longer considered part of your tax-deferred retirement savings. You cannot roll it back into an IRA or 401(k). However, you can deposit the funds into a taxable savings or investment account.
The Wealth Management team at EBS can provide information and support to assist you in understanding RMD requirements and how they may be integrated into your overall retirement plan.
Source: www.irs.gov
This content is for informational purposes only and should not be relied upon for tax, legal or financial advice. Please consult with qualified professionals for personalized advice regarding your specific situation.