At age 70 1/2, you begin taking Required Minimum Distributions (RMDs), from your IRA or qualified plan. To determine the amount, divide your account balance on December 31 of the previous year (adjusted for outstanding rollovers and transfers) by your applicable life expectancy factor. There are also many different situations and rules to consider. To help keep the RMD Rules straight, here’s a quick overview of the more common situations.
When you’re the IRA owner, you have to take your RMD by April 1st the year after you turn 70 ½. After your initial distribution, the deadline changes. You still need to take a RMD, but it has to be made by December 31st of each year. Because of this, postponing your first RMD until the April 1st deadline means you pay taxes on two RMDs in that same year.
Company Retirement Plan Owner:
If you have a company retirement plan, the required beginning date for RMDs is April 1st of the year following the year you reach age 70 ½. However, if you don’t own more than 5% of the company and your plan allows, you can delay your RMD to April 1st of the year following the year you actually retire. This is the “still working” exception. It only applies to RMDs from the employer-sponsored plan(s) of an employer you are currently working for. This doesn’t apply to IRAs or to employer plans if you aren’t currently working for that company.
Be aware the “still-working” exception isn’t available in all plans. Check your individual plan to see if the exception is available to you.
Employer Plan Roth Balances):
Unlike Roth IRA’s which are not subject to RMDs, Roth accounts held in the employee plan are subject to the same RMD rules as your pretax IRA accounts. To avoid distribution requirements, you should consider a direct transfer to a Roth IRA.
Spouse Beneficiary ( IRAs and Company Retirement Plans):
As a surviving spouse, you aren’t subject to RMDs from an inherited IRA or company retirement plan until your deceased spouse would have turned 70 ½. If you’re the surviving spouse, and remain a beneficiary, you use the life expectancy factor from the single life table. You also have the option of rolling assets to your own IRA or company retirement plan (subject to plan rules). In which case, the RMD rules for owners apply (see above).
Non-Spouse Designated Beneficiary (IRA and Roth IRA):
As a non-spouse designated beneficiary, your options are different. Your RMDs must begin by December 31st of the year following the death of the original IRA owner. You can’t roll assets to your account, can’t do a 60-day rollover, and cannot make additional contributions to the account. To calculate the first RMD, use the appropriate life expectancy factor from the single life table. After the first RMD, you subtract one from the previous year’s life expectancy factor. That means someone needs to keep track!
Distributions from the Roth IRA aren’t taxable as long as the original owner had the account for more than five years.
Non-Spouse Designated Beneficiary (Company Retirement Plans):
The start date for RMDs is the same. However, unlike non-spouse beneficiaries that inherit IRAs, those that inherit company retirement plan accounts have two extra considerations:
- The plan doesn’t have to allow the stretch. If it doesn’t, default RMD rules apply. When someone dies before RMDs begin, the 5-year rule applies. When death occurs after starting RMDs, we use the remaining life expectancy of the decedent. You can avoid these scenarios by directly rolling over the inherited plan assets to an inherited IRA.
- You can directly roll inherited retirement plan accounts, including pre-tax and Roth accounts into a Roth IRA.
Trusts (IRAs and Company Retirement Plans):
A trust can qualify as a designated beneficiary. When properly done, each beneficiary can use their life expectancy to distribute their portion over their own lifetime. Otherwise, the life expectancy of the oldest beneficiary is used for all beneficiaries.
This is a very brief summary of RMD rules. There are many other factors that can affect your individual situation. In addition, the penalty of taking less than any RMD is 50% of the shortfall. That’s a pretty strong incentive to make sure you take your RMD’s in full, and on time. It’s always a good idea to work with a qualified advisor when it comes to your RMD requirements.