Here’s what you need to know about RMDs.
Why Do Required Minimum Distributions Exist?
Investment gains within a retirement account aren’t taxed until they’re withdrawn. If you have other sources of income, and if RMDs didn’t exist, you could hypothetically live off your other sources of income and never pay taxes on the retirement account gains; they could potentially be passed onto family or friends as an inheritance without creating a taxable scenario. Account holders are required to withdraw a minimum amount from their retirement funds—and pay tax on that money—each year after they reach a certain age. You must do so by April 1 of the year following the year in which you reach age 72. After the first RMD, you must continue taking RMDs annually by December 31.
When Must I Start Taking Required Minimum Distributions?
Many taxpayers won’t have to take their first RMDs until April 1 of the year after they reach age 72, but the rule wasn’t always this generous. It was age 70½ before the passage of the Setting Up Every Community for Retirement Enhancement (SECURE) Act in December 2019. Anyone who is covered by the old rules (those born before July 1, 1949) has already begun paying RMDs and must continue to do so. Everyone else can wait until April 1 of the year following the year in which they reach age 72.
How Much Do I Have To Take Out?
The amount of your required minimum distribution is based on two factors: You would use your age as of your birthday in the year of your distribution. Use the age as of your 2022 birthday if you’re taking a distribution in 2022. The IRS provides this Uniform Lifetime Table on its website to pinpoint how much your RMDs should be depending on your age. Additional charts are provided if you’re a joint and last survivor of the account, or single.
How Do I Calculate My Required Minimum Distribution?
Take your prior year’s December 31 IRA account balance, look up your age on the appropriate table, and divide your account balance by the remaining distribution period based on your age. Let’s say Bob had $100,000 in his IRA on December 31 of the prior year. Bob decides to take his first distribution in the year in which he turns 72. His remaining distribution period is 25.6. $100,000 / 25.6 = $3,906.25 The amount Bob must withdraw for the calendar year in which he turns 72 is $3,906.25. It would work out like this over the first 20 years, from age 70 through age 90: Your beneficiaries must take RMDs from inherited Roth IRAs. They can’t let the funds grow tax-free forever. They must start taking a specified amount out each year. Although you can’t roll your required minimum distribution to a Roth IRA, you can distribute funds from your IRA “in kind.” This means you distribute shares of an investment instead of cash. Those funds then remain invested in a brokerage account.
Are There Penalties for Not Taking My RMD?
The penalty for not taking a required minimum distribution is a tax of 50% on any amounts not withdrawn in time. The penalty can be waived, however, if you can establish that you failed to take the RMD due to reasonable error and you’ve taken steps to correct the situation. You can file Form 5329 with the IRS to request a waiver from the penalty, along with a letter explaining what went wrong.
