We get questions on what an RMD is: all I can take, how is the amount determined, do I have to take out of each account, etc.
A Required Minimum Distribution (RMD) is the minimum distribution that must be taken at a required age from an IRA or employer-sponsored retirement plan. RMD rules apply to Traditional, SIMPLE, and SEP IRAs. They do not apply to Roth IRAs. RMD rules also apply to employer-sponsored retirement plans, including 401(k)s, 403(b)s, 457, or any other tax-deferred plan. Beneficiary IRAs have RMD requirements also, including beneficiary Roth IRAs.
You can always take distributions beyond your RMD amount. Once you are over the age of 59½, you can choose any distribution amount you want without penalty.
All pre-tax retirement accounts, including Traditional, SIMPLE or SEP IRAs, 401(k), 403(b), and 457(b) have RMD requirements. There are no RMD requirements for Roth IRAs. The RMD rules also apply to inherited Roth IRAs. Employer-sponsored plans such as Roth 403(b) and Roth 401(k) have the same RMD rules as pre-tax retirement accounts.
The RMD amount is determined by the December 31st balance in your account divided by the number of years of life expectancy. Currently, the IRS life expectancy table goes up to 115 years of age. Take Ted, for example. On December 31st, his Traditional IRA balance is $100,000 and Ted is 75 years old. IRS life expectancy table says at 75 years of age Ted should live for another 22.9 years. $100,000 divided by 22.9 years says Ted’s RMD is $4,366.81 for the year. RMD amounts will fluctuate as the account balances go up and down with the market.
Many people ask, “what if I have more than one account retirement account. Do I have to take my RMD from each account?” You must take an RMD from each type of registration.
If Sally has two Traditional IRA accounts, she can take the combined amount from one account. If one of Sally’s Traditional IRAs has an RMD of $2,500 and the other has an RMD of $1,250, the total of $3,750 must be distributed. She can choose to take the RMD from each. She can take one distribution of $3,750 from one account. She can take whatever she wants from each account as long as the total meets her RMD of $3,750.
Donna has a 403(b) and a SIMPLE IRA. Donna’s RMD for her 403(b) is $1,400 and $800 for her SIMPLE IRA. Because these accounts are not the same registration, Donna is required to take a distribution from each account. Donna cannot add the RMDs together and take one distribution.
The SECURE Act, which became effective in January 2020 made significant changes to the requirements of Required Minimum Distributions (RMD). The RMD age changed to age 72.
Anyone who turned 70 ½ before December 31, 2019, must still take their RMDs even if they are not age 72 yet. Individuals who became 70 ½ after December 31, 2019 can wait to begin receiving their RMDs until age 72.
Some individuals do not need the income from their RMDs and would prefer not to have to take them. They are working, collecting a pension, receiving Social Security, or have other means of income. The SECURE Act change in the RMD age allows people who do not need the income to avoid this taxable income for two additional years until age 72.
The SECURE ACT also changed for individuals who inherit retirement accounts. Before the SECURE ACT, when someone inherited a retirement account, RMDs were required to start by the end of the calendar year following death. There was an option to take the RMD over the beneficiary’s lifetime. This is known as the stretch IRA option. In some cases, this allowed the funds to stay in the IRA account for 20, 30, or even 50+ years.
Anyone who now inherits a retirement account after December 31, 2019, must liquidate the account within 10 years of the original owner’s death. There are no annual requirements. You can wait and take it all in the 10th year. You can elect to take partial distributions in years 1, 5, and 7. You can decide to take a monthly distribution for the entire 10 years. You can draw all the money out immediately. The choice belongs to each beneficiary.
Beneficiaries who inherited retirement accounts where the death occurred before December 31, 2019, can continue to take RMD withdrawals over their lifetime. The stretch IRA remains an option.
There are a few exceptions to the new distribution rules. A spouse has the option of rolling the funds into their own IRA and then following their standard RMD requirements. A minor child or a disabled or chronically ill beneficiary has different sets of rules that allow for longer than the 10 years.
Changes to inherited IRA rules could cause concern for tax purposes. If you inherit $20,000 or $30,000 that needs to be distributed over 10 years, you probably can withdraw it without changing tax brackets. However, take someone who inherits a retirement account with $1 million in it. If you must distribute that entire account within 10 years and pay the taxes on it, what would that do to your tax rates in those years that you are taking distributions? For many people, this would be a significant tax increase. More of the inherited funds would go to paying taxes and you would keep less of the funds your loved one passed on to you.
With the stretch IRA options gone, there may be more of a reason to take larger distributions than the RMD amounts if you have significant money in pre-tax retirement accounts. Without the stretch IRA, doing Roth conversions and paying some of the taxes now rather than forcing beneficiaries to pay the tax later may be a good strategy.
The CARES ACT passed in March 2020 because of the Covid-19 pandemic. This ACT has suspended the RMD requirement of 2020. If you do not need the income, you do not have to take a distribution in 2020. If you do need income, you still can take a distribution out of your account.
Another provision of the CARES ACT allows individuals to put back their RMD if it was already taken for the year. There are two ways to do this. If an RMD was taken in the last 60 days, an individual can write a check for the gross distribution and put it back into their retirement account. This is considered a 60-day rollover. IRS only allows one 60-day rollover in a one-year period.
RMDs taken longer than 60 days ago can be returned if an individual can demonstrate COVID-19 has impacted them. IRS set guidelines that must be met to qualify for returning an RMD outside of the 60-day rule. If an individual meets the guidelines, they have up to three years from the date of the RMD distribution to get it back into the account.
Unfortunately, for inherited retirement accounts, the provisions are different. Inherited retirement accounts are not allowed to do the 60-day rollover. If an RMD was taken from an inherited retirement account, it is not eligible to be put back in unless the beneficiary is the spouse of the original account owner. If the beneficiary is the spouse of the original account owner, the RMD is eligible to be put back into the spouse’s retirement account as a 60-day rollover.
Be sure to speak with your tax preparer or financial advisor if these RMD changes apply to you. You may need or want your financial advisor to alter your income distributions. You may need to consider changing the order in which funds are distributed from various accounts. You may want to look at the option of Roth conversions. Being prepared and developing a strategy to reduce your taxes, if possible.
