retirement planning | may 11, 2021
Five Important Things You Should Know About RMDs
Once investors turn age 72, they will need to take required minimum distributions (RMDs) from their retirement accounts, whether they need the money or not.
For IRAs, you must take your first RMD by April 1 of the year after which you turn age 72, regardless of whether or not you are retired. For each year after turning age 72, you must take an RMD by December 31.
If you have multiple IRAs, you must calculate the appropriate RMD for each one. The total amount can be taken from one or more IRAs to satisfy the distribution—as long as the total RMD amount is withdrawn.
If you have multiple prior employer retirement accounts (401(k)s, etc.), you will have to contact your prior employer to calculate the RMD and send you a distribution.
Once the RMD Is distributed, you don’t have to spend it, but it cannot remain in a tax-deferred account.
Judith Ward, CFP®
Senior Financial Planner
Generally, beginning at age 72 (age 70½ if you reached 70½ before January 1, 2020), retirement account holders are required to take RMDs from their tax-deferred retirement accounts. These include Traditional, Rollover, SEP-, and SIMPLE IRAs and employer-sponsored retirement plans. You must pay federal, and sometimes state, income taxes on the taxable amounts of these distributions.
“RMDs aren’t optional,” says Judith Ward CFP®, a senior financial planner with T. Rowe Price. “If you don’t take your RMD, or take out too little, you may be faced with an IRS penalty tax of 50% of the amount not distributed.”
Below are five things you should know about RMDs:
1. When do I need to take the first RMD?
For IRAs, you must take your first RMD by April 1 of the year after which you turn 72, regardless of whether or not you are retired. Your second RMD must be taken by December 31 of that same year. And, each year thereafter by December 31.1
“The distribution can be taken in one lump sum or spread throughout the year as long as the RMD amount is distributed by the due date,” Ward says. “Many IRA holders who spend their RMDs prefer to take monthly distributions.”
These distributions are generally included in your taxable income. Any distributions made through December 31 will be taxed in the current year. For this reason, many IRA holders choose to take their first distribution by December 31 of the year they turn age 72.
Required beginning dates for RMDs from an employer plan vary depending on plan rules. You might not be required to take your first RMD until the later of April 1 of the year following the year you reach age 72 or the year you retire from work with that employer. Please note that you must take each RMD for a qualified employer-sponsored plan from that plan. You may not take the amount from an IRA.
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Mary was born September 1, 1949, and turns age 72 September 1, 2021. She can take her first RMD (based on 12/31/20 IRA balances) by December 31, 2021, and include in her 2021 taxable income. Or Mary can wait until April 1 of 2022 to take her first RMD. Her second RMD (based on 12/31/21 IRA balances) needs to be taken by December 31, 2022. In this example, if Mary takes the two distributions in 2022, both will be included in her taxable income for 2022.
2. Which accounts require distributions?
Most commonly affected accounts that require RMDs include:
|IRAs*||Employer-Sponsored Retirement Plans|
|SEP||Governmental section 457 deferred compensation|
*Roth IRAs don't require RMDs for the account owner, while Roth plan contributions do.
If you’re working at age 72 and have assets in an employer-sponsored retirement plan at your current job, you may be able to delay taking distributions from that account until April 1 of the year after you retire.
3. How do I calculate the RMD?
You need to calculate your RMD each year because it is based on your current age and account balance at the prior year-end.
For IRAs, the account owner is responsible for calculating and taking RMDs. T. Rowe Price offers a free online calculator to help with this, or you can use IRS Publication 590-B and reference Appendix A: Worksheet for Determining RMDs.
The employer is responsible for determining the RMD amount from qualified employer plans (e.g., 401(k)s) and distributing the RMD.
4. I have multiple IRAs. How many RMDs do I need to take?
If you have multiple IRAs, you must calculate the appropriate RMD for each one. However, the total distribution amount can be taken from one or more IRAs to satisfy the distribution as long as the total RMD amount is withdrawn. If you have three different IRAs, for example, you can take the entire RMD amount from just one account.
The 403(b) plan rules mirror IRA rules in that the total distribution from multiple 403(b) plans can be taken from one or more of the 403(b) accounts.
It’s different with 401(k)s. If you have multiple 401(k)s from prior jobs, each plan will calculate the RMD and send a distribution.
“Before age 72 is a great time to review your retirement account structure and consolidate the number of accounts when possible,” Ward says.
5. What if I don't need to spend the distribution?
Once the RMD is distributed, you don’t have to spend it if you don’t need to, but it cannot remain in the tax-deferred retirement account. If you don’t wish to spend the distribution, you can:
Reinvest the money in a regular, taxable account. Add it to your rainy day fund or invest for the longer term.
Invest in your grandchild’s future by using the funds to contribute to a 529 college savings plan or add to one that’s already been established.
Be charitable. Consider a qualified charitable distribution (QCD). You can distribute up to $100,000 directly from a Traditional IRA to qualified charities each year. QCDs can count toward your RMD and won’t be included in your taxable income.
1Those who turned 70½ before July 1, 2019, and are turning 72 this year will be on their 3rd RMD, with a deadline of 12/31.
This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.
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