Required Minimum Distribution (RMD): Do's And Don'ts For Your Retirement Savings Withdrawal (2024)

For Cinderella, the party ended abruptly at midnight. For modern American taxpayers, the party ends when they turn 70-1/2. That's when they must begin to deplete their tax-sheltered retirement savings accounts by starting to take what's called a required minimum distribution (RMD).

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The good news is that there is some flexibility built into required minimum distribution starting dates.

Even better: the U.S. House passed a secure-retirement bill — known as the Secure Act — on Thursday that would delay the deadline for starting to take your first required minimum distribution until age 72.

The Senate, whose version would let people wait until age 75, is expected to vote on its bill by the end of May.

Meanwhile, whichever deadline is in effect, if you don't meet that deadline, you'll be hit by a whopping 50% penalty of the amount you were supposed to withdraw plus income tax due.

So for now at least, if you're at, past or still approaching the age 70-1/2 trigger date, put your thinking cap on and refresh your memory about when you must start to take RMDs and how to calculate them. We'll review the key rules here for you.

It matters whether you want to take out those withdrawals because you need the money to live on. It's a slightly different story if you don't need the income and do want assets to continue to grow inside your accounts without being whittled down by taxes.

Either way, this impacts a lot of people. Very roughly 10,000 baby boomers a day reach age 70-1/2.

Required Minimum Distribution: Who Must Take One?

What are the key things to remember about required minimum distributions? First, remember who has to take them.

That turns out to be anyone who owns a traditional IRA and IRA-based accounts like SEPs, SARSEPs and Simple IRAs.

RMDs also usually apply to regular 401(k) accounts and similar profit-sharing plans. Here's the exception: if you are still working and do not own more than 5% of the company, you do not have to take RMDs from any of your accounts at that workplace.

Also, RMDs do not apply to Roth IRAs while the original owner is alive. Why would they? Roth IRA contributions are made with money left over after you've paid tax on the income. Since no tax is due on a withdrawal from a Roth IRA, it does not matter to Uncle Sam when you take the money out. He's already got his cut.

But that logic does not apply toRoth 401(k) accounts. You've already paid income tax on the money that supplies that contribution too. So you do not owe additional income tax on withdrawals. Still, Congress in its infinite wisdom said the RMD rules apply.

Roth IRA Inheritors

Even with a Roth IRA, the tax-free ride might end when the original owner dies. If your surviving spouse takes over the account, he or she inherits your immunity from RMDs.

If the account ends up with a beneficiary of the surviving spouse, that person has a choice. One option is to take out the entire balance by Dec. 31 of the year that includes the fifth anniversary of the death of the person who had been the surviving spouse.

The second choice is to start making withdrawals based on the beneficiary's life expectancy. Those RMDs must start by Dec. 31 of the year after the year of the owner's death. This is called the term-certain method.

That "either-or" choice also applies if the person who inherits the account after the original owner's death is someone other than a surviving spouse.

We'll explain more about how the size of withdrawals are calculated, below.

RMD: What To Do With The Money

You won't owe more tax on an RMD you take, but you can't leave it inside that sort of tax-deferred account. Whatever sort of taxable account you put it into, Uncle Sam gets to tax any further earnings on the money.

You can invest an RMD in a regular, taxable brokerage account. You can plow it back into the same stocks, mutual funds or ETFs it was in inside your retirement account. "We see a good number of customers sending it to a taxable account and investing it the same way it was invested before (the RMD)," said Joe Gaynor, director, retirement and income solutions for Fidelity Investments.

If the retirement and taxable accounts are both at Fidelity, the fund firm will handle many of the share-transfer steps for you, Gaynor says. So will most any big financial firm if your before and after accounts remain with them.

A third option: you can put it into a checking or savings account. Or you can withdraw the money and spend it.

When Must You Begin RMDs?

The second key thing to understand about a required minimum distribution is when it first kicks in.

You must take your first RMD by April 1 of the year after you turn age 70-1/2.

Suppose your birthday is Aug, 1 of this year. You would turn 70-1/2 on Feb. 1, 2020. You'd have to take your first RMD by April 1, 2021.

A different deadline applies to all RMDs after your first one. After your first RMD, you must take each year's RMD by Dec. 31 of that year.

That means you've got to make a strategic decision about your first required minimum distribution: Do you want to be forced to take two RMDs in the same calendar year?

Let's still imagine that your 70th birthday is Aug. 1 this year. If you wait until April 1, 2021 to take your first RMD, your second RMD must be taken by Dec. 31, 2021.

"I caution people that you probably don't want to do that because doubling the RMD would tend to give you too much taxable income in that year," said Roger Young, a senior financial planner for T. Rowe Price.

The double RMD, plus your Social Security benefit, plus any additional income from work or investments could push you into a higher tax bracket. "So plan ahead," Young added. "Decide if you want to avoid risking a higher tax bill by taking your first RMD in the year you turn 70-1/2, not the year after."

One more point: "If you take up the IRS on their grace period (by waiting until April of the year after you turn 70-1/2), remember that the deadline is April 1, not April 15," Young said. "It is not the same date as the regular federal tax due date."

Calculate How Much To Withdraw

Each required minimum distribution is based roughly on your life expectancy. Your retirement account balances are divided by a number that resembles your life expectancy, taken from IRS tables. The result is that year's RMD.

Those IRS tables show what's called a life expectancy factor for people at any age from 70 on up.Say you've got a retirement account balance of $100,000. At age 72, your life expectancy factor is 25.6. Divide $100,000 by 25.6. The resulting $3,906.25 is your RMD for that year.

The IRS uniform lifetime table is the one that most people use. If your beneficiary is your spouse and he or she is more than 10 years younger than you, you must use the joint life expectancy table. People who inherit an account use other tables.

Generally, the same rules apply to IRA and 401(k) RMDs. But many additional options can apply to 401(k) accounts. Check with your plan to find out its particular rules.

Required Minimum Distribution: Any Reprieve?

What happens if you miss any RMD deadline? Is there any way to escape the 50% penalty and tax?

T. Rowe Price's Young says there is no specific review process. But that he knows of taxpayers who have won reprieves. "I know people who have gotten the penalty waived," Young said. "One guy who missed the deadline wrote an apology to the IRS, said it was a mistake and took his RMD. He paid the income tax and was excused from the penalty. That said, I wouldn't count on being able to do that or being able to do it more than once."

RMDs: How IRAs And 401(k)s Differ

Different rules govern how you must take each required minimum distribution from IRAs and 401(k)s, Young says. With IRAs, you can add together all of your account balances. After calculating your current RMD, you can take out that amount from one of your IRAs or from any combination of them, in any proportion that you like.

With 401(k)s, you must calculate each account's RMD separately and withdraw only that amount from each one.

Charitable Contributions

If you want to make a charitable contribution, you can use the RMD as a tax-management strategy.

You can arrange for your IRA custodian to transfer the contribution directly to a qualified charity. That's known as a qualified charitable distribution (QCD).

A QCD of up to $100,000 counts toward satisfying your required minimum distribution for the year.

That amount is also excluded from your taxable income that year, because you did not take the money out personally. That can also help you qualify for certain tax credits and other tax breaks.

And QCDs don't require you to itemize it on your tax return.

"With the new tax rules (under Trump tax reform), you can claim the new, higher standard deduction while still excluding this charitable contribution from your taxable income," Gaynor said.

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