7 things to know about RMDs

Minimum Required Distributions (RMDs) are IRS-mandated distributions from retirement accounts. It’s important to understand how they work so you can make sure you’re following the rules. Here are seven things you should know about RMDs.

When do you need to start RMDs?

Effective January 1, 2020, the age at which RMDs of retirement accounts must begin has been raised to 72 years. Previously it was 70½ years. Those who started their RMD at age 70½ before January 1, 2020 must continue their RMD under the old rules.

How are RMDs calculated?

RMDs are based on the balance in your account(s) as of December 31st of each year. For example, if you have a traditional IRA account, your balance as of December 31, 2021 was used to calculate your RMD 2022.

The balance for the previous year-end is then reconciled to the appropriate IRS distribution table. For most people, this is the Uniform service life table, Table 3. There are different tables if your spouse is 10 years younger than you or with a life expectancy of only one person.

Using the Uniform Lifetime chart for someone turning 73 in 2022:

  • Balance as of December 31st in IRA $250,000

  • Distribution period from Table 3: 26.5 years

  • RMD calculation for 2022: $250,000 divided by 26.5 = $9,433.96

This is the amount they would have to take as RMD for 2022.

There are a number of good RMD calculators online that can help you calculate your RMD. A few years ago, the rules for reporting RMD amounts to the IRS were changed, requiring IRA custodians and pension plan administrators to calculate your RMD each year and report that number to the IRS. The manager will also give you this number.

What is the deadline for acceptance of your RMD?

Your RMD must be taken by December 31 of each year. The exception to this applies to your first RMD. You can postpone this until April 1 of the following year. For those turning 72 in 2022, they can postpone their first RMD until April 1, 2023.

It is important to remember that if you defer your first RMD to the following year, you will be taking two RMDs in the same calendar year as you still need to take your regular RMD for the following year. You should consider the tax implications before deciding whether to defer your first year RMD.

Which accounts are subject to RMDs?

RMDs must be withdrawn from all employer-sponsored retirement plans, including:

  • 401(k) accounts, both traditional and Roth

  • 457 plans

  • 403(b) plans

  • Profit Sharing Plans

RMDs must also be taken from Traditional IRAs, SEP IRAs, SARSEPS and SIMPLE IRAs. Defined benefit plans are also subject to RMDs, but this requirement is generally met by annuitizing the benefit.

Roth IRAs are not subject to RMDs.

Are RMD taxable?

RMDs are subject to federal income tax at normal income tax rates. Roth 401(k)s RMDs are not taxed as long as they meet the requirements for a qualifying distribution, including meeting the five-year rule for Roth contributions.

Whether or not RMDs are subject to state income tax varies by state, as some states do not tax distributions from retirement accounts.

What are the penalties for not taking RMDs?

The penalty for not taking part or all of your RMD is 50% of the amount not taken. You must continue to take the undrawn amount as a distribution and all taxes must still be paid.

Ways to defer or avoid taxes on RMDs

There are several ways to defer or avoid taxes on RMDs.

Qualified Charitable Distributions (QCDs) Permit individuals age 70½ and older to divert up to $100,000 in distributions from a traditional IRA to a qualifying nonprofit. There are no taxes on QCDs. They can also be used to meet some of your RMD requirements, eliminating taxes on that part of the RMD. Note that unlike regular charitable donations, QCDs are not eligible for a charitable tax deduction.

Work longer may allow you to move RMDs for any money in your current employer’s 401(k) if they have made the correct choice as part of their plan documents. This deferral only applies to RMDs on this plan, RMDs on other accounts have yet to be claimed. Once you are no longer employed by that employer, RMDs must be related to that money as well. Note that if the plan allows, you may consider a reverse rollover from an IRA into the plan to also defer RMDs on that money.

Roth IRA conversions. RMDs are not required of money converted into a Roth IRA. This is a way to eliminate future RMDs for some or all of the money in a traditional IRA. Note that the conversion amount will be taxed in the year of conversion. It is also important to note that RMDs for a given year must always be taken based on the RMD calculation before making any Roth conversions during the year.

A Qualified Longevity Annuity Agreement (QLAC) is a deferred annuity that can be earned within a qualifying retirement plan or IRA. Up to $145,000 can be used to purchase a QLAC, and annuity payments can be deferred until age 85. No RMDs are required for this money during the deferral period, it will resume once annuity payments begin.

As you get closer to the age when RMDs need to start, make sure you understand how they work, what you need to do, and how to defer or reduce any RMDs that may apply to you. RMD planning is an important part of your income planning for retirement. 7 things to know about RMDs

Brian Lowry

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