Required minimum distributions (RMDs): the basics

Tax-deferred retirement accounts postpone income tax, but not forever. Once the owner reaches a certain age, the law requires a minimum amount to be withdrawn each year so that the deferred income is eventually taxed. These withdrawals are called required minimum distributions, or RMDs. The rules are mechanical, and most problems come from missed deadlines or from assuming all accounts are treated alike.

Which accounts have RMDs

According to the IRS, the RMD rules apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit-sharing plans and other defined contribution plans.

Roth accounts are treated differently. The same IRS page says withdrawals are not required from Roth IRAs, or from designated Roth accounts in a 401(k) or 403(b) plan, while the account owner is alive. Beneficiaries who inherit any of these accounts, Roth or not, are subject to their own distribution rules, which are covered in inherited IRAs: the basic rules.

When RMDs start

The IRS states that account owners generally must start taking withdrawals when they reach age 73. Earlier laws used age 70½ and then 72, which is why older articles and some paperwork show different ages. Age 73 applies to people born from 1951 through 1959. For people born in 1960 or later, the starting age is scheduled to be 75, as shown in the Pension Benefit Guaranty Corporation's summary of the required beginning date.

Two dates matter:

• The first RMD is for the year the owner turns 73. It can be taken during that year or delayed until April 1 of the following year. That April 1 deadline is called the required beginning date.
• Every later RMD is due by December 31 of its year.

Delaying the first one has a consequence. The RMD for the following year is still due by that December 31, so two distributions land in the same tax year. The IRS points out that taking the first withdrawal by December 31 of the year the owner turns 73 allows the two distributions to be included in income in separate tax years.

The still-working exception

For workplace plans, the IRS says participants can delay taking RMDs until the year they retire, unless they are a 5% owner of the business sponsoring the plan. This depends on the plan's own terms; a plan document may require distributions to begin at 73 even for someone still employed. The exception does not extend to IRAs, including SEP and SIMPLE IRAs, where RMDs begin at 73 regardless of employment.

How the amount is calculated

The IRS describes the calculation this way: the RMD for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS's Uniform Lifetime Table. The table is published in Publication 590-B. A different table is used when the sole beneficiary is a spouse more than 10 years younger than the owner, which produces a smaller required amount.

The divisor gets smaller each year as the owner ages, so the required percentage of the account rises over time.

A hypothetical example

Suppose someone turns 73 during the year and their traditional IRA held $265,000 on December 31 of the prior year. The Uniform Lifetime Table in Publication 590-B lists a denominator of 26.5 for age 73.

$265,000 divided by 26.5 equals $10,000.

That is the minimum for the year. The owner can always withdraw more, but the IRS notes that a distribution in excess of the RMD for one year cannot be applied to a future year. The round numbers here are for illustration only.

Although an IRA custodian or plan administrator may calculate the figure, the IRS says the account owner is ultimately responsible for taking the correct amount.

Multiple accounts

The rules for combining accounts are easy to get wrong.

• IRAs. The RMD is calculated separately for each traditional IRA, but the IRS says the owner can withdraw the total from one or more of them. SEP and SIMPLE IRAs are IRAs for this purpose.
• 403(b) accounts. These can be combined with each other in the same way.
• 401(k) and 457(b) plans. The RMD has to be taken separately from each plan account.

A withdrawal from an IRA does not satisfy a 401(k) RMD, or the reverse. People with several old workplace accounts sometimes consolidate them partly to simplify this; the general choices are described in the guide to options for an old 401(k).

How RMDs are taxed

RMDs from pre-tax accounts are included in taxable income and taxed at ordinary rates, except for any part that represents after-tax contributions (basis). They cannot be rolled over into another retirement account, and the RMD for a year cannot be converted to a Roth IRA.

Because the income arrives whether or not it is needed, RMDs can push other calculations upward, such as the taxable share of Social Security benefits and income-related Medicare premiums. How different kinds of retirement income are taxed explains how the pieces fit together.

One alternative for people who give to charity: a qualified charitable distribution sent directly from an IRA to a charity counts toward the RMD without being included in income.

What happens if an RMD is missed

The IRS states that if the full RMD is not withdrawn by the due date, the amount not withdrawn may be subject to an excise tax of 25%, or 10% if the RMD is timely corrected within two years. The tax is reported on Form 5329.

The IRS also says the penalty may be waived if the account owner establishes that the shortfall was due to reasonable error and that reasonable steps are being taken to remedy it. Requesting a waiver involves filing Form 5329 with a letter of explanation.

Common misunderstandings

• "RMDs have to be spent." The requirement is only that the money leaves the tax-deferred account. After tax, it can be saved or invested in an ordinary account.
• "A Roth 401(k) has RMDs." Under current IRS guidance, designated Roth accounts in 401(k) and 403(b) plans do not have RMDs during the owner's lifetime.

Because the calculation, deadlines and tax effects depend on each person's accounts and tax situation, a tax professional can advise on specifics.