The rules surrounding Required Minimum Distributions (RMDs)
have changed over the past few years and it can be challenging to keep up with
evolving IRS regulations.
RMDs are the minimum amounts the IRS requires taxpayers to
withdraw each year from certain types of traditional individual retirement
accounts (IRAs) or other types of non-Roth retirement accounts, such as SEP
IRAs, SIMPLE IRAs, 401(k)s and 403(b)s, once taxpayers reach a specified
age. While the concept may sound
straightforward, RMD rules can become quite complex in practice.
Age at Which RMDs Must Begin:
The age at which RMDs must begin depends on your year of
birth, as shown below:
|
Year of
Birth |
Age RMDs
must begin |
|
Before July
1, 1949 |
70 1/2 |
|
July 1, 1949
- Dec. 31, 1950 |
72 |
|
1951 - 1959 |
73 |
|
1960 -
current |
75 |
Upon reaching the applicable age, the first RMD must be
taken by December 31 of that year or, if deferred, by April 1 of the following
year. Deferral is permitted only for the first RMD and may result in two
taxable RMDs in one year.
For instance, if you turn 73 during 2026, you must take your
first RMD by April 1st of 2027 (if not taken earlier in 2026). You must
also take your annual RMD for 2027 by December 31st of 2027. As a result, two RMDs would be taken in 2027. Each year thereafter, annual RMDs must be
taken by December 31st.
Aggregation Rules:
Generally, if you have multiple IRAs, only one combined RMD
is required. However, caution needs to be exercised if inherited IRAs or 401k
are involved, as they may have their own RMD requirements. For instance, RMDs from 401(k)s and other
employer plans generally must be taken separately from each plan and Inherited
IRAs follow different rules and cannot be combined with your own IRA RMDs.
How are RMD's Calculated:
RMDs are designed to gradually distribute retirement savings
over your remaining life expectancy. The formula for this calculation is the
account balance as of December 31st of the prior year divided by the
life expectancy factor, published by the IRS.
For most taxpayers, you will use the Uniform Lifetime Table, but in some
instances, the Joint Life and Last Survivor or Single Life Table would be
appropriate. While you are ultimately responsible for ensuring the correct RMD
is taken, many IRA custodians, investment advisors, and retirement plan
administrators calculate and report RMD amounts to account owners each year.
IRS Relief for Missed RMDs:
If you fail to withdraw your required RMD by the deadline,
the IRS may impose a penalty, also known as an "excise tax". Recent legislation
reduced the amount of the excise tax from 50% of the amount required to be
withdrawn to 25%. If the failure is
timely corrected within two years, the penalty may be further reduced to 10%.
Coordinating Charitable Giving and RMDs:
A Qualified Charitable Distribution (QCD) is an effective
way to transfer funds directly from your traditional IRA to a qualified
501(c)(3) public charity. When done correctly, the distribution is excluded
from gross income, and the distribution is considered part of your RMD. QCDs are a powerful tax planning tool because
they lower your Adjusted Gross Income (AGI), which has many additional tax benefits
that are derived from AGI. QCDs can also favorably impact Medicare IRMAA tiers,
taxability of Social Security Income, Net Investment Income Tax, itemized
deduction phase-outs and limitations, and State tax addbacks. However,
care must be taken to ensure that the funds are transferred directly from the
IRA custodian to the charity and that the charity is not a donor-advised fund
or a private foundation.
What is the 10-year Distribution Rule:
Prior to 2020, many beneficiaries could "stretch"
distributions over their life expectancy. This allowed withdrawals to be taken
into income over a longer period, thereby allowing the beneficiaries to take
advantage of lower tax brackets. The SECURE Act changed this by enacting a rule
that requires most non-spousal beneficiaries to withdraw assets within 10 years
of the account owner's death.
The SECURE Act established the following three IRA
beneficiary categories, with differing rules for each.
- Eligible designated beneficiaries (EDBs), which
includes the following:
- Surviving spouse
- Disabled or chronically ill individuals
- An individual who is not more than 10 years
younger than the IRA owner
- Minor children (only until they are no longer
minors)
- Certain trusts: Conduit/see-through Trusts
- Non-eligible designated beneficiaries (non-EDBs),
which includes the following:
- Adult Children
- Grandchildren
- Friends
- Other Family Members
- Other Individuals that don't meet requirements of
EBDs
- Non-designated
beneficiaries, which include the following:
- Charities
- Estates
- Certain
trusts (non-qualified)
Eligible designated beneficiaries (EDBs) generally receive
an exemption to the 10-year rule and can continue to distribute RMDs over their
life expectancy. The most common EDB is a surviving spouse.
Non-eligible designated beneficiaries (non-EDBs) are
essentially any designated beneficiary that doesn't fit into the category of
eligible designated beneficiary. One of the most common instances we see is the
adult child of the deceased. These beneficiaries are subject to the 10-year
rule and must fully distribute the inherited account by December 31st
of the 10th year following the year of the IRA owner's death. If the
decedent died after their required beginning date, the non-EDBs is required to
take annual RMDs during years 1 through 9 of the 10-year period, in addition to
fully distributing the account by year 10.
Non-designated beneficiaries, including charities, estates,
and non-qualified trusts, are subject to different distribution rules depending
on whether the decedent died before or after beginning RMDs. If the decedent
died before being required to take RMDs, then the account must be fully
distributed by the end of the fifth year following death. If the decedent had already begun taking
RMDs, distributions must be made over the decedent's remaining single life
expectancy.
