Q1. What is a Required Minimum Distribution (RMD)?
An RMD is the minimum amount that IRA and retirement plan account owners must withdraw from their retirement account each year after reaching a certain age.
Q2. At what age will my Required Minimum Distribution (RMD) begin?
Age 73 (Age 72 if you reached age 72 before Jan. 1, 2023). This age will increase to 75 in 2033.
Q3. Is there an exception to this rule?
Yes, the IRS states that generally you can delay taking your RMD from your workplace retirement plan (such as a 401k) until the year you retire, unless you own 5% or more of the business sponsoring the plan.
Q4. How much do I have to withdraw – how is it calculated?
Based on current IRS guidance, the distribution taken your first year at age 73 will be about 3.77% of your account balance, and each year thereafter the percentage will slowly increase. The amount of your RMD is calculated using IRS life expectancy tables, taking into consideration your age and the account balance as of December 31 of the previous year. Your financial advisor or account custodian should be able to calculate and provide you with your exact RMD amount each year.
You can always withdraw more than your RMD. But that extra withdrawal will not count toward satisfying your next year’s RMD.
Q5. Can I reinvest my RMD?
Yes, some clients don’t want the funds to go to their bank. They would prefer to put the funds to work in another investment account, such as an individual or joint brokerage account. You can certainly do this. Regardless, the amount you withdraw from your IRA will be included in your taxable income.
Q6. Do RMDs apply to my Roth IRA, Roth 401(k), or Roth 403(b)?
Roth IRAs do not require distributions until after the death of the owner.
Roth 401(k) and Roth 403(b) accounts, if you’re retired, are subject to the RMD rules for 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts. In other words, you must still take RMDs from designated Roth accounts for 2023, including those with a required beginning date of April 1, 2024. (If you haven’t retired, see the exception in Q3 above.)
Q7. Is my RMD distribution taxable?
Typically, the amount withdrawn is treated as taxable income and will be taxed at your ordinary income tax rate. This generally does not apply to Roth distributions.
Q8. Can I distribute my RMD without it being taxable?
Yes, one idea is the qualified charitable distribution (QCD).
Q9. What if I have multiple accounts with RMDs?
If you have more than one retirement account, you need to calculate the RMD for each account separately. However, you may aggregate the total amount from IRAs and take it from a single IRA if you wish. Defined contribution plan accounts (e.g., 401k) must be withdrawn seperately.
Q10. Is there a penalty if I don’t satisfy my RMD?
Yes, the IRS imposes a penalty on any RMD amount not distributed by the deadline. According to the SECURE 2.0 Act of 2022, the penalty is 25%, and that penalty might be reduced to 10% if you correct it in a timely manner. The IRS has waived this penalty in the past under certain circumstances.
Understanding and complying with the rules surrounding RMDs is vital in retirement planning to avoid penalties and optimize your tax situation. You should consult with your tax advisor and financial advisor before making any decision regarding your RMDs.
(This article doesn’t apply to Beneficiary IRA accounts, which have different RMD rules. Talk with your advisor for more information.)
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