This article serves as a general overview of RMDs and what you might not know. Regarding tax laws and the IRS, it is always best to review the most up-to-date information available on their website about required minimum distributions. We also highly recommend working with a certified tax accountant who can advise you on the most current information.


Defining required minimum distributions

A required minimum distribution (RMD) is the amount of money that owners and qualified retirement plan participants must withdraw from employer-sponsored retirement plans, traditional IRAs, SEPs, or SIMPLE IRAs once they reach retirement age. You will usually have to calculate the RMD for each account separately if you have more than one.


What purpose do RMDs serve? 

Because traditional IRAs and 401(k) plans use pre-tax dollars, the IRS imposes RMDs to prevent individuals from avoiding paying the deferred tax liability owed on those contributions. In short, RMDs safeguard against people using a retirement account to avoid paying taxes. 


When do RMDs start?

Individuals must take minimum distributions from qualified retirement accounts at age 72. Before the year 2020, the RMD age was 70½. The SECURE Act of 2019 changed the distribution rules for some inherited IRAs, effectively eliminating the “stretch IRA”—an estate planning strategy that extended the tax-deferral benefits of IRAs.

IRS penalties apply if you do not take your RMD after 72. The amount not withdrawn will be taxed at 50%.


Inheriting an IRA

A person inheriting an IRA must take the same RMD as the account owner for the year of their death. For years following the account owner’s death, however, your RMD will depend on your identity as the designated beneficiary. 


You may still need to take RMDs even if you’re still working

If you continue working past age 72, you must take an RMD from your IRA. However, you may qualify for an exception from taking RMDs from your current employer-sponsored retirement accounts, if:

  • You continue to work
  • You do not own more than 5% of the company you work for

You may delay taking an RMD from the account until April 1 of the year after you retire if you meet all the criteria above. Some qualified plans allow certain participants to defer the start of their RMDs until they retire, even if they are older than 72. Qualified plan participants should check with their employers to determine whether they are eligible for this deferral. This would not apply to IRAs or other accounts you may have with former employers.


Retirement planning

Planning for your inevitable retirement can be a complex and overwhelming task. Helping people plan for their retirement is what we do. If you’re looking to start investing in your retirement, want to change your strategy, or need some guidance as you approach retirement age, we’re here to help. Contact us today to get started.