January 17, 2020

Edited 11/19/20

Required Minimum Distributions (RMDs) 101

Everything you need to know about RMDs and the strategy behind it.

In a post-pension world, planning for retirement is quite complicated. In fact, 50% of retirees are afraid of running out of money in retirement: a maze of new rules to follow, 300-page books (on Social Security alone) to read, and a series of high consequence decisions that can’t be reversed. Silvur lays down everything you need to know about Required Minimum Distributions so you can set your retirement savings up for success.

What is a Required Minimum Distribution (RMD)?

A required minimum distribution (RMD) is the amount of money you need to withdraw from qualified retirement plans, such as IRAs, 401(k)s, and Roth 401(k)s with the exception of Roth IRAs, starting at age 72. Under the SECURE Act, the age for withdrawing changed from 70 ½ to 72 years old. This change allows for a retiree’s account to grow for an additional year and a half.

Note: Due to the COVID-19 pandemic, RMDs have been suspended in 2020 under the CARES Act. This includes beneficiaries with an inherited account. You should resume taking RMDs in 2021 unless the IRS issues another waiver. Also, this doesn’t mean you will need to take a ‘double’ RMD in 2021, just your regular calculated amount for the year.

What Retirement Plans Fall Under the RMD Rule?

Not all plans are subject to RMDs, especially, if you already have paid taxes on them like your Roth IRAs. Here are the plans that the RMD rule applies to:

  • Traditional IRAs
  • SEP IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Profit sharing plans
  • Other defined contribution plans

How Do You Calculate RMDs?

Retirement accounts may have different RMDs. RMDs are based on your age’s distribution period and your account balance at the end of the previous year. The IRS has a worksheet that will help you calculate your RMDs.

In addition, RMDs are found on a number of different forms, depending on who your broker is. At the year-end account statement, an RMD letter is due from your broker by January 31 or an IRS Form 5498 (sent at the end of May).

Additional Important Information about RMDs

  • If you forget to take an RMD, the IRS imposes a 50% penalty on the unpaid amount. For a 75 year old with a $200,000 IRA, that penalty could be as much as $4,366.
  • There are special requirements for inherited IRAs that an account holder must take regardless of what they are.
  • IRA account holders whose spouse is more than 10 years younger and is the sole beneficiary will need to use a different table to calculate their RMD.