Required Minimum Distributions or RMDs: The Basics Every Retiree Should Know
Hi friends,
For most of your working life, the retirement playbook is simple: put as much as you can into your traditional IRA or 401(k) and let it grow. Then, at a certain age, the playbook changes. You generally have to start taking money out, whether you need it or not.
These mandatory withdrawals are called required minimum distributions, or RMDs. They are not complicated once you understand them, but the details matter.
The best time to start thinking about required minimum distributions is not the year your first one is due. Starting three or four years earlier gives you time to understand how the added income may affect your taxes, Social Security, Medicare premiums, and other retirement decisions.
One recent situation shows why this planning matters.
We worked with someone who retired in 2018. A required minimum distribution was being sent from the main retirement account each year, so it seemed as though the annual requirement had been met. What had not been considered were several other smaller retirement accounts from former employers.
Communication about required minimum distributions had arrived, but it appeared unnecessary because a distribution was already being received. Unfortunately, taking a distribution from one account does not automatically satisfy the requirements for every other account. By the time the problem was discovered, several distributions had been missed and costly penalties followed.
Quick Summary: The Basics of Required Minimum Distributions
Required minimum distributions are yearly withdrawals from most pre-tax retirement accounts.
They generally begin at age 73 for people born from 1951 through 1959 and age 75 for those born in 1960 or later.
Most required minimum distributions are due by December 31, although the first distribution may be delayed until April 1 of the following year.
Taking one required minimum distribution does not automatically cover every retirement account. The required amount must first be calculated for each account. Traditional IRA amounts may then be combined and withdrawn from one or more IRAs, while most 401(k)s require a separate distribution from each plan.
Apple Blossom Tax Service recommends beginning required minimum distribution planning 59 ½ before your starting age so you have time to understand the effect on your taxes, Social Security, and Medicare premiums.
Why Required Minimum Distributions Exist
The starting age depends on your birth year. Under current law, required minimum distributions generally begin:
At age 73 if you were born from 1951 through 1959
At age 75 if you were born in 1960 or later
Your first required minimum distribution has a special grace period. You may take it during the year you reach your starting age or delay it until April 1 of the following year. Required minimum distributions after that first year are generally due by December 31.
There is a catch with that grace period. If you delay your first distribution until April 1 of the following year, you will need to take two taxable distributions in the same calendar year: the delayed first distribution by April 1 and the regular second distribution by December 31.
This is why planning ahead is important. Two taxable withdrawals in one year could affect your tax bracket, Medicare premiums, or how much of your Social Security is taxable. Delaying the first distribution is not always the better choice.
Apple Blossom Tax Service can run the numbers with you before the first distribution is due. A tax consulting and optimization session can help you understand how required minimum distributions may affect your income and taxes before you make a decision.
Some workplace retirement plans have another exception. If you are still working, you may be able to delay required distributions from your current employer’s plan until you retire. This generally does not apply if you own more than 5 percent of the business sponsoring the plan, and it does not apply to traditional IRAs.
How Is the Required RMD Amount Calculated?
The basic calculation is straightforward. Your required minimum distribution for the year is generally your account balance as of December 31 of the previous year divided by a life-expectancy factor published by the IRS. You can review those factors in the IRS life-expectancy tables.
Your account custodian or retirement-plan administrator will usually calculate the amount for you. Many also offer automatic distributions. Even so, you remain legally responsible for taking the correct amount by the deadline, so it is worth verifying.
The required percentage generally increases as you age because the life-expectancy factor gets smaller. A retiree in the early seventies may withdraw a little under 4 percent of the account balance. That percentage rises over time.
If the account maintains or increases its value, the taxable distribution may also grow. This can create a larger tax effect later in retirement than expected, particularly when the distribution is added to Social Security, pension income, and other taxable income.
This is another reason to include future required minimum distributions in your retirement and tax planning several years before they begin.
A Few Required Minimum Distribution Rules That Can Trip People Up
Different accounts have different aggregation rules. If you have several traditional IRAs, you must calculate the required minimum distribution for each account. You may then combine those IRA amounts and take the total from one or more of your traditional IRAs.
Most employer plans do not work that way. Required distributions from 401(k)s generally must be taken separately from each plan. A withdrawal from an IRA generally cannot satisfy the requirement for a 401(k), and a withdrawal from one 401(k) generally cannot satisfy the requirement for another.
This distinction caused the problem in the situation described above. Receiving one required distribution did not mean the requirements for all the other accounts had been handled.
The withdrawal is taxable income, and the effects can spread. A required minimum distribution is generally added to your ordinary income for the year. That additional income can affect how much of your Social Security is taxable and may increase future Medicare premiums through the income-related monthly adjustment amount.
It is not only the tax on the distribution itself. It is also what that additional income may do to the rest of your tax return.
You cannot convert a required minimum distribution to a Roth account. If you are completing a Roth conversion during a year in which you owe a required distribution, you must take the full required amount first. The required distribution itself cannot be converted.
Taking extra does not count toward next year. You may withdraw more than the required amount, but the excess cannot be applied to a future year’s required minimum distribution.
What Happens If You Miss a Required Minimum Distribution?
For many years, missing a required minimum distribution triggered an excise tax equal to 50 percent of the amount that should have been withdrawn. It was one of the steepest penalties in the tax code.
The SECURE 2.0 Act reduced that tax. Missing all or part of a required minimum distribution may now result in an excise tax equal to 25 percent of the amount not withdrawn. That amount may be reduced to 10 percent when the mistake is corrected within the permitted period.
The IRS may also waive the excise tax when the shortfall resulted from a reasonable error and reasonable steps are being taken to correct it. This generally requires taking the missed distribution, filing Form 5329, and including an explanation of what happened and how it was corrected.
The important part is not to ignore the problem. Correcting it promptly, filing the proper forms, and documenting what happened can make a meaningful difference.
How Yearly Planning Can Prevent a Required Minimum Distribution Problem
Apple Blossom Tax Service reviewed every retirement account in this situation and determined which required distributions had been missed. We helped coordinate the corrective distributions, prepared the required filings for the affected years, documented the circumstances, and submitted a request asking the IRS to waive the penalties.
Every available step was taken to correct the filings and mitigate the penalties as much as permitted. Required distributions are now being taken from all the appropriate accounts, and we review the accounts each year to confirm that nothing has been overlooked.
This was a common mistake, but it was also preventable. A yearly review can identify smaller accounts left with former employers, confirm which IRA distributions may be combined, and make sure separate 401(k) requirements are handled correctly.
Where Required Minimum Distributions Fit in Your Retirement Planning
For many retirees, required minimum distributions are a coordination question more than a difficult calculation. Your financial planner or account custodian may calculate the distribution, set up automatic withdrawals, and decide which holdings to sell.
Our role is the tax side. We look at all of your retirement accounts, review how the distributions fit with the rest of your income, and watch for effects on Social Security taxation and Medicare premiums. If a distribution has been missed, we can help determine what needs to be corrected and prepare the required filings.
We do not advise on investments or decide which holdings should be sold. We can coordinate with your financial planner so the required withdrawals fit into your broader tax picture.
Apple Blossom Tax Service offers retirement and tax planning to help identify old accounts, review future required distributions, and look for tax-planning opportunities before they become costly surprises.
If you are within three or four years of your starting age, this is a useful time to gather a complete list of your retirement accounts and run the numbers.
Frequently Asked Questions
When should I start planning for required minimum distributions?
Apple Blossom Tax Service recommends discussing required minimum distributions about three or four years before you reach the starting age. This gives you time to understand how the added income may affect your taxes, Social Security, Medicare premiums, and other retirement decisions.
At what age do required minimum distributions begin?
Under current law, they generally begin at age 73 if you were born from 1951 through 1959 and age 75 if you were born in 1960 or later. Different rules may apply to certain workplace plans if you are still employed.
Does taking a distribution from one account cover all my retirement accounts?
Not automatically. The required amount must be calculated for each account. Required amounts from traditional IRAs may generally be combined and withdrawn from one or more traditional IRAs. Most 401(k)s require a separate distribution from each plan, so every account should be reviewed individually.
Do Roth accounts have required minimum distributions?
Roth IRAs and designated Roth accounts in 401(k) and 403(b) plans do not require lifetime distributions for the original owner. Beneficiaries may still be subject to distribution rules after the owner’s death.
When is my required minimum distribution due?
Most required minimum distributions are due by December 31. Your first distribution may be delayed until April 1 of the following year, but delaying it usually means taking two taxable distributions during that year. The additional income may affect your taxes and retirement benefits.
What if I do not need the money from my RMD?
You still have to take the required amount. Once it has been withdrawn and any applicable tax has been paid, you may spend it or reinvest it in a regular taxable account.
If you are charitably inclined and meet the eligibility requirements, a qualified charitable distribution may satisfy all or part of your required minimum distribution without adding the donated amount to your taxable income.
What happens if I miss the deadline?
The excise tax may equal 25 percent of the amount not withdrawn. It may be reduced to 10 percent when the mistake is corrected within the allowed period. The IRS may also waive it when the shortfall resulted from a reasonable error, corrective steps were taken, and the proper request was filed.
Who calculates the required amount?
Your account custodian or retirement-plan administrator will often calculate it, but you remain responsible for taking the correct amount. Double-check the requirement if you have several accounts, changed custodians, rolled money between accounts, or left retirement funds with former employers.
What to Do Next
If you are approaching your required minimum distribution age or managing retirement accounts from several employers, it may be time for a complete review. Apple Blossom Tax Service can help you identify which accounts require distributions, understand how the rules apply, and coordinate with your financial planner.
We want to be proactive, not reactive. Please contact us before the deadlines arrive.
Warmly,
Melissa Ochoa
Enrolled Agent & Owner, Apple Blossom Tax Service
Serving Sebastopol and Sonoma County
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This article provides general tax information, not individualized tax, legal, or investment advice. Required minimum distribution and retirement-account decisions depend on your circumstances and should be coordinated with your tax, legal, and financial professionals before acting.
