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A Simple Guide to RMDs for Retirees

Until now, your 401(k), traditional IRA, and other qualified retirement accounts may not have been taxed. However, when you turn 73, the government requires you to take required minimum distributions (RMDs) that levy taxes on a specific amount of your savings.

Taking required minimum distributions from qualifying accounts is nonnegotiable. So, it’s imperative to understand what the government expects so you can avoid penalties for noncompliance. Here’s what you need to know.

What Are Required Minimum Distributions?

An RMD is the annual minimum amount you must withdraw from your tax-deferred, qualified retirement account. Accounts with required minimum distributions include:

  • Traditional individual retirement accounts (IRAs)
  • 401(k) plans
  • 457(b) plans
  • 403(b) plans
  • Savings Incentive Match Plan for Employees (SIMPLE) IRAs
  • Simplified Employee Pension (SEP) IRAs

Roth IRAs don’t require minimum distributions. But if you inherit a Roth IRA (or other retirement account), it may be subject to RMD rules.

When Do You Start Taking RMDs?

Previously, you had to take your first required minimum distribution the year you turned 72. The age limit recently increased to 73 with the passage of Secure Act 2.0. After you turn 73, the deadline to take a minimum required withdrawal is December 31 of that year. However, you can delay the first withdrawal until April 1 of the year after you turn 73.

If you continue to work past age 73, you may be eligible to forgo your first required minimum distributions. However, it depends on the account type. For example, even if you continue working after age 73, you must take your required minimum distribution from your traditional IRA.

What Are the Penalties for Not Taking RMDs?

Failure to take your minimum required withdrawal by the deadline triggers a 25% penalty, called an excise tax. This financial consequence underscores the importance of meeting your RMD obligations. If you correct the error within two years, the IRS may lower the penalty to 10% or waive it entirely if the distribution shortfall was due to a reasonable mistake.

How Do You Calculate Your RMD for the Year?

You’ll need two figures to calculate your required minimum distribution for the calendar year:

  • Your tax-deferred retirement account’s balance on December 31 of the previous year
  • A distribution period from the IRS’s life expectancy tables

The IRS publishes three life expectancy factor tables, which represent the average number of years someone at a certain age can expect to live. You select the option that best reflects your situation:

  • Use the Uniform Lifetime table (Table III) if you’re an unmarried IRA owner, a married IRA owner with a spouse who isn’t 10 years younger, or a married IRA owner with a spouse who isn’t the account’s sole beneficiary. Most account holders use this table.
  • Use the Single Life Expectancy table (Table I) if you’re a beneficiary who isn’t the IRA owner’s spouse.
  • Use the Joint Life and Last Survivor Expectancy table (Table II) if you’re an IRA owner with a spouse 10 years younger than you who’s the only beneficiary.

Calculating your RMD is typically straightforward. After finding your life expectancy factor, divide the balance in your retirement account on December 31 by this number.

RMD Calculation Examples

Here are some hypothetical examples to illustrate the process of finding the minimum required distribution for different groups.

For a 79-Year-Old Person

Say you’re a retired 401(k) participant who just turned 79 and your account balance was $1,000,000 on December 31 of last year. You’d divide your balance by your life expectancy factor (21.1) to calculate a required minimum distribution of $47,393.36. You must withdraw at least this amount to avoid a hefty penalty of $11,848.34 (25% of $47,393.36).

For a Younger Spouse

Suppose your spouse is your only beneficiary and is over a decade younger than you. You’d use the IRS Joint Life and Last Survivor Expectancy table instead of the Uniform Lifetime table to get the correct life expectancy factor.

If you’re 79 and the only beneficiary of the IRA is your 59-year-old spouse, the life expectancy factor from the IRS Joint Life and Last Survivor Expectancy table would be 28.7. After dividing $1,000,000 by 28.7, your RMD would be $34,843.21.

Do You Have to Take an RMD on an Inherited Account?

While many of the same RMD rules apply when you inherit a retirement account, additional restrictions may be based on your relationship with the deceased account owner.

Designated Beneficiaries

You’re a designated beneficiary if you’re named to inherit a 401(k), IRA, or other qualified account. Generally, you must liquidate the account by the end of the 10th year after the IRA owner’s death. This applies if you inherited an IRA from someone who passed after December 31, 2019. A different set of rules apply if the account holder passed before 2020.

Eligible Designated Beneficiaries

One exception to the 10-year rule is if you’re an eligible designated beneficiary. You’re eligible if:

  • You’re the deceased IRA owner’s spouse or minor child.
  • You’re no more than 10 years younger than the IRA owner.
  • You’re disabled or chronically ill.

You can then take distributions over your life expectancy. If you’re required to take minimum distributions and don’t, you’re still subject to the 25% penalty.

Spousal Beneficiaries

You’re a spousal beneficiary if your spouse names you as the beneficiary on their account.

If your spouse dies before they start taking RMDs, you can keep the retirement account as an inherited account. In this case, you have a few options:

  • You can delay distributions based on your spouse’s (the original account holder’s) age.
  • You can take distributions based on your life expectancy.
  • You can take distributions based on the 10-year rule.
  • You can roll over the inherited account into your own IRA.

If your spouse dies after the required beginning date for taking distributions, you have two options:

  • You can keep the retirement account as an inherited account and take distributions based on your life expectancy.
  • You can roll over the inherited account into your own IRA.

If you inherited a Roth IRA that you roll over into your own Roth IRA, you don’t have to take RMDs.

Non-Spouse Beneficiaries

If you inherit an IRA but you’re not the account holder’s spouse, the RMD options vary depending on the type of beneficiary you are. If you’re an eligible designated beneficiary, you can:

  • Use the 10-year rule.
  • Take disbursements over the longer of your life expectancy or the original account owner’s remaining life expectancy.

How Do RMDs Work with Multiple Retirement Accounts?

If you have several tax-deferred retirement accounts, you must calculate the minimum required withdrawals for each. While it’s possible to take an RMD from one account to represent your total distribution requirements for the year, it depends on the type of retirement account. This is because each account could have different distribution factors applied.

Traditional, SEP, Rollover, and SIMPLE IRAs

Calculate the required minimum distribution for each account individually, but you can withdraw the entire RMD tally from one or more accounts.

403(b) Accounts

Calculate the RMD for each 403(b) account. However, you can take the total RMD amount from one or more 403(b) accounts.

401(k) Accounts

If you have several 401(k)s, calculate every RMD separately. You must take an RMD from each 401(k) account.

Is Your RMD Taxed?

Yes, your required minimum distribution is taxable. The proceeds from your account are taxed like ordinary income and may be subject to state and federal taxes.

Can You Withdraw More Than the RMD?

The required minimum distribution is the least amount you must withdraw from the account to avoid penalties. Because all distributions are taxable, you can withdraw more than the RMD. However, additional withdrawals can’t apply to future required distributions.

Work with a Financial Professional to Find Your RMD

Required minimum distributions can be complex, but you’re not alone. A financial professional can offer personalized guidance so you can move forward confidently. If you could benefit from this expert insight and assistance, reach out to a Bankers Life representative today.

Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.