Managing Required Minimum Distributions

With the passing of the SECURE Act on December 20th, 2019, you must now take your first required minimum distribution (RMD) from your retirement accounts in the calendar year in which you turn 72.  Your first RMD must be taken no later than April 1st of the following year.  If you elect to postpone your first RMD until the following year, please note that you will be subject to two years’ worth of income that year. Each year thereafter the RMD is recalculated and must be withdrawn by December 31st.  The accounts subject to RMDs include traditional IRAs, beneficiary IRAs, Simple IRAs, SEP IRAs, Keogh plans, 401k, 457, and 403b plan.

Some key points regarding RMDs:
  • The RMD amount is calculated by taking the value of your account on December 31st of the prior year and dividing by your life expectancy factor for the current year, which can be found in the Uniform Lifetime Table compiled by the IRS.  The life expectancy factors in this table are updated by the IRS periodically with last update being for 2022.   
  • RMDs for beneficiary IRAs have arguably the biggest change as part of the SECURE ACT.
    • If you inherited an IRA prior to 2020 the previous rules are still in place.
    • If you inherit a retirement account after 2020 you will then have 10 years to completely withdraw the balance of the account.  This is a major change and one that may come with large tax consequences for beneficiaries.
  • Distributions may be made all at once, or on a periodic basis over the course of the calendar year.
  • The deadline for completing your RMD is December 31st.  The only exception is for your first RMD which can be postponed until April 1st of the following year.  
  • RMDs are taxed as ordinary income unless you have after-tax cost basis in your retirement account from previous non-deductible contributions which have been recorded on form 8606 with your tax returns.
  • RMDs are calculated on a per account basis.  However, if you have more than one account subject to an RMD, the amount may be aggregated and disbursed from one account.  As long as the full amount is withdrawn by December 31st, your obligation is satisfied regardless of which account the distribution came from.
  • It is critical to take out what is required.  Failure to take your full distribution will be met with a 50% penalty from the IRS on the amount not taken.
  • Your custodian will calculate the RMD amount for each account and send the information out during the first quarter of the year.

Every year starting in October, our financial advisors review all accounts with an RMD to make sure owners have either taken a full distribution or are on track to do so by the end of the year.  For those accounts that still need to have additional funds withdrawn to satisfy RMD requirements, we will be in touch during the quarter.