If you are age 72 or older, the Internal Revenue Service (IRS) may require that you withdraw a minimum amount from your retirement account(s) every year. This is called a required minimum distribution (RMD).
Update: CARES Act Waives 2020 RMDs
The Coronavirus Aid, Relief and Economic Security (CARES) Act, which became law on March 27, 2020, waives the required minimum distribution (RMD) for 2020 for all types of defined contribution plans, including 401(a), 401(k), 403(b), and governmental 457(b) plans, as well as IRAs. RMDs are not waived for defined benefit plans.
Which retirement accounts have RMDs?
RMDs apply to all employer-sponsored retirement plans, including defined contribution plans such as 401(a), 401(k), 403(b) and 457(b) plans. RMDs also apply to most types of Individual Retirement Accounts (IRAs) such as traditional, SEP and SIMPLE.1
Roth IRAs are handled differently. If you are the original account owner, you do not have to make any withdrawals from a Roth IRA during your lifetime. However, RMDs may apply to a Roth IRA that you inherit from someone other than your spouse.
When to I have to withdraw the RMD?
The beginning date for your first RMD from retirement plans is generally April 1 following the calendar year in which you reach age 72. The terms of your employer-sponsored retirement plan may also allow you to wait until the year you retire, if later, to begin taking your RMDs.
For each subsequent year after the year of your required beginning date, you must withdraw your RMD by December 31. This means that if you turned 72 this year, you can choose to wait until April 1 of next year to take your first RMD. But you’ll still need to take your second RMD by December 31 of that year. This means that you will have to take two RMDs in the same tax year.
You generally have to take the first withdrawal from your IRA, SIMPLE IRA and SEP IRA on April 1 of the year following the calendar year in which you reach age 72.
How much do I have to withdraw?
How much you have to withdraw depends upon your current age and the balance of your account(s) as of December 31 of the previous year. Generally, the older you are, the greater the percentage of your account balance you must withdraw each year. However, if the sole beneficiary of your account is your spouse and s/he is more than 10 years younger than you are, your spouse’s age matters too. You can use our calculator to estimate your RMD for either scenario.
What happens if I don’t withdraw enough?
As with most IRS rules, there is a penalty if you don’t comply. If you don’t make a withdrawal or withdraw less than you should, the IRS excise tax is 50% of the difference between what you withdrew and the RMD. For example, if your RMD is $3,000 and you only withdraw $2,000, the difference is $1,000. You will owe excise tax equal to half of that, or $500.
What if I inherited an account?
In the year of the account owner’s death, the RMD will be equal to whatever the account owner should have taken. After that, how much and when you are required to withdraw depends in part on who you inherited the account from. If the original account owner was your spouse, you have several options on when to receive and how to calculate the RMDs. If you inherited the account from someone other than your spouse or choose not to treat the account as your own, the rules are different and more complex. You should speak with a financial advisor to ensure you understand when you may need to take withdrawals from an inherited account and the tax implications of doing so.
What if I have more than one account? If you have more than one account, you’ll have to calculate the RMD for each account separately. But if you have more than one traditional IRA, you can add the RMD from each of your traditional IRAs and withdraw the total amount from any one of them. The same goes for a 403(b) account. For all other plan types, including any inherited IRAs, you’ll have to make a withdrawal from each of them.
¹ RMDs also apply to defined benefit plans, but this article focuses on account-based plans.
Note: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.