Are you nearing retirement or already enjoying your golden years? Then it’s crucial to familiarize yourself with the required minimum distribution (RMD) rule. This regulation, enforced by the Internal Revenue Service (IRS), mandates that once you reach a certain age, typically in your seventies, you must start withdrawing funds from your traditional IRA, traditional 401(k), and other employer-sponsored retirement plans. In 2024, this age is set at 73.
But hold on! If you’re still working at age 73 or older and have a traditional 401(k) or a similar retirement plan with your current employer, you’re exempt from taking an RMD. However, any other traditional 401(k)s, IRAs, or similar tax-advantaged plans you’ve accumulated over time are still subject to RMDs.
Now, let’s dive into what these rules mean for your financial well-being during retirement.
Example of a RMD
Meet John, a retired accountant who just turned 76 and has $500,000 in a traditional IRA. While he wishes to keep the money untouched, tax laws require him to withdraw a portion of it and add it to his taxable income. Failing to do so would result in hefty penalties.
By referring to an IRS-provided chart, John discovers that he needs to withdraw $21,097. This figure is derived by dividing his balance of $500,000 by the life expectancy factor of 23.7 for his age. And there you have it – $21,097 is his RMD, the minimum amount he must withdraw from his IRA.
RMD Rules
RMDs apply to most tax-advantaged retirement accounts, including traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and 403(b)s. Even if you’ve inherited a retirement account, it’s subject to RMDs (with the exception of Roth IRAs, which aren’t subject to RMDs during the owner’s lifetime but are required for heirs).
While your first RMD can be delayed until April 1 of the year after you turn 73, subsequent RMDs must be taken by December 31 of each year. This means that if you defer your first RMD, you’ll need to take two RMDs in the following year.
Failing to withdraw the required RMD amount by the deadline can lead to substantial penalties. Previously, the penalty was a high 50% excise tax on the amount not withdrawn. However, thanks to the recent SECURE Act 2.0, the penalty has been reduced to 25% of the minimum amount that should’ve been withdrawn but wasn’t.
To navigate the complexities of RMDs and how they intersect with your retirement savings and overall portfolio, it’s advisable to seek guidance from a financial advisor or tax professional.
How is an RMD Calculated?
Calculating RMDs involves your retirement account balance and a life expectancy factor provided by the IRS. This calculation ensures a gradual distribution of funds from your tax-advantaged retirement accounts over your lifetime. Follow these steps:
- Determine your account balance, usually based on its value as of December 31 of the previous year.
- Select a life expectancy factor (distribution period) from IRS tables based on your age.
- Divide your retirement account balance by the distribution period for your age. This resulting figure represents your RMD.
It’s important to note that your RMD is recalculated annually because as you grow older, the life expectancy factor decreases. Consequently, you’ll need to withdraw a larger percentage of your account balance.
If your retirement account is managed by an investment firm such as Empower, their financial advisors can assist in calculating your RMD. Just ensure that you contact them in time to have the funds transferred before the end of the tax year.
What are Life Expectancy Charts?
The IRS provides life expectancy charts to aid individuals in calculating RMDs for their employer-sponsored retirement plans. These charts come in three types:
- The Single Life Expectancy Table is for beneficiaries who are not the spouse of the IRA owner.
- The Joint Life and Last Survivor Expectancy Table is used by married individuals whose spouses are more than 10 years younger and are the sole beneficiary of the account.
- The Uniform Lifetime Table is utilized by unmarried retirement account owners calculating their own withdrawals, married individuals whose spouses aren’t more than 10 years younger, and married individuals whose spouses aren’t the sole beneficiaries of their retirement account.
IRA Required Minimum Distribution (RMD) Table
The Uniform Lifetime Table is the most commonly used for RMD calculations. Here is the most recent version of the table:
[Image: Uniform Lifetime Table]
Penalties
Remember, you have until December 31 to take your RMD for each year. Failing to withdraw the full RMD by that date will result in the untaken amount being taxed at 25%. However, if you correct the RMD within two years and file IRS Form 5329 with your federal tax return, the penalty can be reduced to 10%.
TIME Stamp: Knowing the RMD Rules Can Save You a Fortune
Building a nest egg throughout your career is no easy feat. Don’t let all that hard work go to waste during retirement by neglecting your RMDs. Although the penalties have been significantly reduced, the best way to avoid them entirely is to become familiar with RMD figures as they pertain to your savings. Investing an hour or so in studying and planning can ultimately save you thousands of dollars!
Frequently Asked Questions (FAQs)
What are inherited IRAs, and how are they subject to RMDs?
Inherited IRAs pass to beneficiaries after the original account holder’s death. These inherited IRAs are subject to RMDs, which dictate how beneficiaries must withdraw funds over time.
Typically, the spouse of the original account owner is the beneficiary, and they have the option to treat the inherited IRA as their own or roll it over into their personal IRA, following regular RMD rules for traditional IRAs.
Non-spouse beneficiaries, such as children, face different RMD rules. Generally, they must begin taking RMDs from the inherited IRA by December 31 of the year following the original account owner’s death and potentially withdraw all funds within ten years.
What are the SECURE Act 2.0 changes to RMD rules?
The SECURE Act 2.0, signed into law by President Biden, includes several changes to RMD rules, building on provisions from the SECURE Act of 2019. The key changes are:
- Retirement account owners can now delay their RMDs until age 73 and, beginning in 2033, as late as age 75.
- Participants in Roth employer plans, such as 401(k)s, are no longer required to take lifetime RMDs from these accounts.
- Tax penalties for not taking or taking less than the required RMD have been reduced.
What is the mandatory withdrawal rate at age 73, and how much money do I have to take out of my 401(k)?
The withdrawal rate is determined by dividing your account balance by the distribution period based on your age and life expectancy. For a 73-year-old using the Uniform Lifetime Table, with a distribution period of 26.5, an example calculation would be dividing $1 million in retirement savings by 26.5, resulting in an RMD of $37,736 for the year.
At what age do RMDs stop?
There is no upper age limit for when RMDs stop. IRS tables extend up to age 120 and beyond, and as of January 2024, the oldest person in the United States is 115 years old.
What is the RMD percentage for 2024?
The RMD percentage is derived from the distribution period determined by the IRS based on age and status. In the Uniform Lifetime Table, this number ranges from 27.4 (age 72) to 2.0 (age 120 and older). It’s important to note that the distribution period changes every year.
That wraps up our exploration of required minimum distribution (RMD) rules. Remember, taking the time to understand and follow these guidelines can save you a fortune in penalties. For more insights and information on personal finances, visit Personal Finances Blog – your go-to resource for all things money-related.