The IRS does not want you to keep funds in your retirement accounts indefinitely. Therefore, it specifies Required Minimum Distribution amounts (RMD’s) and distribution schedules for those funds. The RMD’s vary depending on the type of account and the circumstances.
It is important to emphasize: the IRS is serious about the RMD’s being taken. If they are not taken when required or in the correct amounts there is a 50% penalty levied against the withdrawal amounts not taken.
Generally for employee retirement accounts (e.g., 401(k), 403(b), 457, or the Federal Thrift Savings Plan), the first RMD is required to be taken either by April 1 of the later of the year you turn 70 ½ or the year you retire. However, the plan’s terms ultimately govern, and your plan may require you to take your first distribution by April 1 of the year after you reach 70 ½ even if you haven’t yet retired.
For IRA’s, SIMPLE IRA’s, and SEP IRA’s, the first RMD must be taken by April 1 of the year following the year you reach age 70 ½.
Roth IRA’s have different rules. The IRS does not require any distributions until the owner’s death, but then the account beneficiary will either have to take out the entire balance by December 31st of the year containing the fifth anniversary of the owner's death or will have to start taking distributions over their life expectancy, based on IRS distribution factor tables, starting no later than December 31st of the year following the year of the owner's death.
Suppose you inherit a traditional IRA as a named beneficiary of that IRA? You also have RMD responsibilities, which differ depending on whether you are the spouse or non-spouse of the person that originally owned the IRA, and whether the owner died before or after their required beginning date for taking RMD’s.
Here’s just one example: suppose you are the sole beneficiary of your spouse’s IRA and they died before their required beginning date. Then you have the option of treating it as your own and not taking RMD’s until you are required to based on your own age, or leaving it as a beneficiary IRA and taking RMD’s based on your age (but you don’t have to begin until your spouse would have turned 70 ½) or withdrawing the entire amount by the fifth anniversary of your spouse’s death. A non-spouse beneficiary does not have the option of treating the inherited IRA as their own and must either take RMD’s based on their age or over a five year period. The rules differ somewhat if the original owner died after their required beginning date for RMD’s.
How are the RMD’s calculated? As previously noted, the IRS has constructed tables of distribution factors based on actuarial determinations of life expectancies. There happen to be three different tables of factors depending on whether you have a spouse that is more or less than 10 years younger than you and is your sole IRA beneficiary, or you are single. Relevant account balances are divided by these factors to determine the RMD’s, and RMD’s increase each year since life expectancies decrease with age.
As should be clear from the above discussion, the RMD rules are complicated and can be tricky, so whether it’s your own account or an account you inherited it’s very important to consult with your accountant and financial advisor to make sure that you understand what your RMD options are and that the RMD’s are withdrawn in the correct amounts and by the required deadlines. You don’t want to subject yourself to the IRS 50% penalty!
This article is not intended as individualized legal, tax, investment, or other advice.