Retirement Plan Required Minimum Distributions: What you need to know

As we recently explained in our blog, Unraveling the Web of Retirement Accounts, retirement planning can be tricky. There are several retirement account possibilities, and there are complex rules regarding contributions to and distributions from retirement plan accounts.

One of the most important aspects of planning for retirement is understanding the evolving and potentially complicated rules regarding Required Minimum Distributions (RMDs).

In this two-part article, we will review and summarize the RMD rules. Check back for part 2, where we provide possible planning suggestions for RMDs.

What are Required Minimum Distributions (RMDs)?

Required minimum distributions (RMDs) are mandatory withdrawals from certain tax-deferred retirement accounts that the IRS requires account holders to take annually, starting at a specific age. The apparent legislative purpose is to ensure that the government eventually receives tax revenue on the money that was contributed pre-tax and grew tax deferred.

The legislative history of RMDs dates to 1974 with the creation of IRAs under the Employee Retirement Income Security Act (ERISA).

Initially, RMDs had to be taken by December 31 of the year the account holder turned 70.5 years old. However, like many other federal tax rules, there have been numerous revisions to the RMD provisions in the last 50 years.

In 1986, the Tax Reform Act made RMDs mandatory for all qualified retirement plans such as 401(k)s, and pushed the start date to April 1 of the year after turning age 70.5.

The SECURE Act of 2019 increased the RMD age from 70.5 to 72. The SECURE 2.0 Act of 2022 increased the RMD age to 73 starting in 2023, and 75 starting in 2033. The first RMD can be delayed until April 1 of the year after reaching the applicable RMD age.

What types of retirement plans require minimum distributions?

The following retirement plans require minimum distributions (RMDs) starting at age 73 (75 starting in 2033):

• Traditional IRAs
• Simplified Employee Pension (SEP) IRAs
• Savings Incentive Match Plan for Employees (SIMPLE) IRAs
• Employer-sponsored retirement plans like 401(k), 403(b), and 457(b) plans.
• Other defined contribution plans

Roth IRAs do not require RMDs during the original account owner's lifetime. However, inherited Roth IRAs do require RMDs. See discussion of inherited retirement accounts below.

What is the deadline for taking the first required minimum distribution?

The deadline for taking the first required minimum distribution (RMD) is April 1 of the year after you turn the applicable RMD age, which is currently 73 (75 starting in 2033). For subsequent years, RMDs must be taken by December 31 annually.

For example, if you turn 73 in 2023, you can take your first RMD by December 31, 2023, or delay it until April 1, 2024. If you delay the first RMD, you will have to take two RMDs in that same year - the delayed first one by April 1, and the second one by December 31.

If the retirement plan owner dies before taking all or part of the annual RMD, whatever remains must be taken. The responsibility for taking the year-of-death RMD falls to the beneficiary. It is not paid to the retirement plan owner’s estate and cannot be paid to the deceased retirement plan owner. It is paid and is taxable to the beneficiary.

Important to note: Delaying the first RMD could potentially push you into a higher tax bracket for that year since you will have to take two distributions. Some tax planning may be beneficial.

How are RMD amounts calculated?

To calculate your RMD, start by visiting the IRS website and accessing IRS Publication 590-B Distributions from Individual Retirement Arrangements (IRAs). This document has the RMD tables (example below) that you will use to calculate your RMD.

Then, take the following steps:

1. Locate your age on the IRS Uniform Lifetime Table (Table III in Appendix B of Publication 590-B – see below)
2. Find the “distribution period” that corresponds to your age.
3. Divide your retirement account balance as of December 31 of the previous year by your current distribution period.

Scenario: You just turned 78. If your IRA balance was $100,000, your RMD for the year would be $4,545.45 ($100,000 / 22 (the applicable distribution period for age 78 per the IRS Uniform Lifetime Table)).

Take note that calculating your RMD works a bit differently if your spouse is the only primary beneficiary of your account and is more than 10 years younger than you. In this case, you must use the IRS Joint Life and Last Survivor Expectancy Table (Table II in Appendix B of IRS Publication 590-B). If this applies, then your life expectancy factor would be based on the ages of you and your spouse. But the formula for calculating the RMD doesn’t change.

If you have multiple retirement plans such as a 401(k) and a traditional IRA, you need to calculate RMDs for each plan separately. However, you can combine your RMDs and withdraw the total amount from just one plan or from any combination of the plans you own. You likely want to do this if it is more advantageous for you to draw down certain accounts or investments before others.

Note that, generally, most financial institutions and brokerage firms will calculate your RMDs for you. However, this can typically only be accomplished if that financial institution or brokerage firm holds all your retirement accounts. Therefore, to streamline the RMD calculation and processing, it may be beneficial to consider consolidating your retirement accounts with a single firm.

What are the RMD rules for inherited retirement accounts?

RMDs for inherited retirement accounts such as IRAs and 401(k)s depend on several factors, including the type of beneficiary and the account owner's age at death. Therefore, the rules are more complicated. The complications include special rules for Roth IRAs and year-of-death RMDs payable to beneficiaries. As we reported in Important Reminder: Complete, Review, and Update Beneficiary Designations, current and up to date beneficiary designations are a financial planning necessity, especially for retirement accounts.

Spouses as beneficiaries

• Surviving spouses generally receive the special treatment with respect to RMDs.
• Under the SECURE 2.0 Act they can opt to be treated as a beneficiary of the retirement plan or elect to be treated as its owner. 
  • A spouse who chooses to be treated as a beneficiary of the retirement plan can “step into the shoes” of the deceased spouse. If the owner dies before his or her required beginning date (or at any age, for Roth IRA owners), RMDs to the surviving spouse can be postponed until the later of:
    • the year following the deceased owner’s death, or
    • the year of the deceased owner’s required beginning date for RMDs. Generally, the owner’s required beginning date for RMDs is April 1 of the calendar year following the calendar year in which the owner attains the applicable age for beginning RMDs. At that time, RMDs will be based on the surviving spouse’s life expectancy. 
  • Beginning in 2024, the SECURE 2.0 Act allows the spouse to be treated as the retirement plan’s original owner. This is more favorable if the surviving spouse is younger. In that case, RMDs would be based on the younger spouse’s life expectancy, and distributions would not need to begin until the spouse reached the required beginning date.
• Special rules apply if the spouse is more than 10 years younger than the deceased owner. For these younger spousal beneficiaries, the lifetime RMDs can be calculated over the joint life expectancy of the deceased owner and spouse.
  • A younger surviving spouse who needs financial support may choose to treat an IRA inherited before age 59½ as a beneficiary IRA. This allows the spouse to take distributions as desired without incurring the 10% penalty for early withdrawals, regardless of age.
• A spouse may also choose to treat the inherited retirement plan as a beneficiary retirement plan if he or she is older than the deceased spouse. This could result in a smaller RMD than the one based on the surviving spouse’s age.
  
  • To be treated as a beneficiary, the spouse must take RMDs. If no RMD is taken before the end of the year following the account owner’s death, the account will be deemed to be rolled over to the spouse’s own IRA.
  • If the spouse is treated as the owner of the retirement plan, normal retirement plan rules apply. In other words, the spouse is not required to take an RMD until his or her required beginning date. If the retirement plant is a Roth IRA, the spouse is not required to take RMDs at all. This gives the spouse the opportunity to pursue the “stretch” retirement plan concept, naming his or her own beneficiaries and deferring tax longer after his or her death.

Non-spouse inherited retirement plans

• Most non-spouse beneficiaries who inherited accounts from owners who died after 2019 must fully withdraw the balance within 10 years. If the retirement plan owner died before reaching his required beginning date, no annual RMDs are required; but the entire account must be emptied by the end of the 10th year.
  • However, if the retirement plan owner died after 2019 and had already reached their required beginning date for RMDs, the non-spouse beneficiary must begin receiving RMDs in the year after the owner’s death. The annual amount must be at least equal to the required RMD of the deceased owner. However, the entire account must be withdrawn by the end of the 10th year. Some tax planning may be beneficial to determine if a larger RMD should be taken each year, rather than waiting until the 10th year to take the balance of the account.
• Eligible designated beneficiaries (disabled individuals, chronically ill, minor children, etc.) can still stretch RMDs over their life expectancy, similar to spouses as beneficiaries.
• For accounts inherited from owners who died before 2020, beneficiaries may still be able to stretch RMDs over their life expectancy under the old "stretch IRA" rules.
• The SECURE 2.0 Act raised the age for starting RMDs on inherited accounts to 73 (75 in 2033) if the original owner hadn't yet started RMDs.
  • However, if the original owner had already started taking RMDs, the beneficiary must begin taking the RMDs in year after the owner’s death, regardless of the beneficiary’s age.
• The IRS has provided penalty relief for missed RMDs from certain inherited accounts as the new rules are implemented.
  • The SECURE 2.0 Act changed the distribution period for designated beneficiaries of retirement plans from 5 to 10 years. In addition, proposed regulations interpreting this new law change required that the beneficiary of a retirement plan of an owner who died after their required beginning date must continue to take an annual distribution in the first calendar year after the owner’s death.
    • This distribution rule differed from the prior 5-year distribution period rules which required no RMD to the beneficiary until the end of the 5-year period.
  • Since this change may have resulted in some retirement plan beneficiaries inadvertently missing an RMD under the new rules and possibly being subject to penalties for not properly taking required RMDs, the IRS issued final regulations providing penalty relief for applicable retirement plan beneficiaries for 2021, 2022 and 2023.

Article Contributed by Barry Groebel.