The age at which required minimum distributions (RMDs) must be taken from qualified retirement plans was changed in a 2019 law. The beginning age was changed from 70½ to 72.
The required minimum distribution (RMD) rules limit the extent to which an individual can use the tax deferral of an IRA or other qualified retirement plan. The RMD rules dictate when distributions must be made from the retirement plans of certain taxpayers.
The rationale behind the RMD rules is that Congress provided the tax benefits of IRAs and other qualified retirement plans to help individuals save for retirement, but the benefits are to be used primarily for the original account owner’s retirement. They aren’t to be used as estate planning tools, to accumulate wealth protected from income taxes or to transfer wealth to other individuals.
The required minimum distribution rules are established in Internal Revenue Code §409(a). But the tax code section isn’t very specific. The details of the RMD rules are in the IRS regulations issued under §409(a).
Failure to take the required minimum distribution from an IRA or other qualified retirement plan can result in the imposition of perhaps the highest penalty in the tax code. The penalty is 50% of the amount that should have been distributed from the plan but wasn’t. The penalty is in addition to any income taxes due on the distribution. The penalty might be waived if the account owner qualifies for one of the exceptions and files Form 5329 with the IRS requesting a waiver of the penalty.
The RMD amount doesn’t have to be taken in a lump sum. It can be taken in any pattern the account owner wants. Some account owners have an equal amount distributed each month to resemble a pension annuity. Others take quarterly distributions. Some wait until near the end of the year to take the entire RMD as a lump sum. Still, other account owners take distributions during the year whenever they need the money. All that matters to the IRS is that at least the RMD amount is distributed from the account by the deadline.
The RMD rules set only the minimum amount that must be distributed from a qualified retirement plan. The account owner can take additional distributions from the plan, and there are no restrictions in the tax law on the maximum amount that can be withdrawn during the year after the account owner turns age 59½.
Required minimum distributions from a traditional IRA or 401(k) plan are included in the taxpayer’s gross income and taxed as ordinary income, except to the extent that the distribution includes after-tax contributions to the plan.
Who Must Take Required Minimum Distributions?
The required minimum distribution rules have changed significantly in recent years.
One rule that hasn’t changed is that original owners of Roth IRAs and Roth 401(k) accounts do not have to take RMDs during their lifetimes. They can let the accounts compound without taking distributions if they wish.
Original owners of traditional IRAs, 401(k)s and other defined-contribution plans must take RMDs after reaching a specified age. RMD rules also apply to traditional pensions, known as defined benefit pension plans. But the plan sponsors are responsible for complying with the rules, so their application to defined benefit plans isn’t discussed in this article.
Originally the age that triggered RMDs was 70½. Anyone who reached age 70½ before 2020 is subject to the original rules. The first RMD had to be taken by April 1 of the year after the year in which the owner turned 70½. RMDs had to be taken by December 31 of each year after the year in which the owner turned 70½.
Owners who turned age 70½ after 2019 don’t have to take RMDs until they reach age 72. The first RMD has to be taken by April 1 of the year after the owner turns 72. Subsequent RMDs have to be taken by December 31 of each year after the year in which the owner turned 72.
While the IRS rules don’t require the first RMD to be taken until April 1 of the year after the owner turns 72, it often is a good idea to take that first RMD by December 31 of the year in which the owner turns 72. Suppose an IRA owner turned 72 in 2021. If he waited until March of 2022 to take the first RMD (which is permitted), he would have to take his second RMD by December 31, 2022. He would have two RMDs in his gross income in one year. That could increase his income taxes substantially. His overall tax bill might be lower if he took the first RMD in 2021 and the second in 2022.
The account owner’s age is the only factor that triggers RMDs for traditional IRAs. The RMDs must begin even if the account owner is still working. The rule is a little different for an employer-sponsored retirement plan, such as a 401(k). RMDs don’t have to begin as long as he still is working for the employer who sponsors the retirement plan, unless the account owner also is a 5% or greater owner of the employer.
A simple calculation determines the amount of the RMD.
First, the account owner determines the account balance as of December 31 of the year before the RMD is to be taken. For example, 2022 RMDs are calculated using the account balance as of December 31, 2021.
Second, the account owner determines his or her life expectancy factor using the life expectancy tables published by the IRS in the back of IRS Publication 590-B. There are three life expectancy tables. Table I is used by beneficiaries who inherit IRAs and aren’t subject to the 10-year distribution rule. Table II is for an IRA owner whose spouse is the sole beneficiary of the IRA and is more than 10 younger than the owner. Table III is for other IRA owners.
Third, the account balance is divided by the life expectancy factor. The result is the RMD for the year.
The calculation is repeated each year. The new account balance as of the previous December 31 is used to begin the calculation. This automatically adjusts the calculation for changes in the investment values and for any distributions in the previous year that exceeded the RMD.
Be sure to use the current life expectancy tables. In late 2020 the IRS issued final regulations that contained new tables with slightly longer life expectancies. Those tables first will be used for 2022 RMDs. They will apply to all people who compute RMDs, not only those who are taking RMDs for the first time in 2022 and later years.
When you have more than one IRA, first you calculate the RMD separately for each IRA.
Then, you have several options. You can take the calculated RMD from each IRA. Or you can add all the RMDs, known as aggregating them. Then, you can take the aggregated RMD from the IRAs in any proportion you want. Keep in mind that Roth IRAs are not subject to required minimum distributions until the original account owner has passed and should not be included in the total.
The entire aggregated RMD can be taken from one IRA. It can be taken proportionally from each, or an equal amount can be taken from each IRA. Or any other allocation you think of can be taken as long as the total at least equals the aggregate RMD for the year. Some people use the aggregation method to rebalance their portfolios or make it easier to manage their IRAs in the future.
For example, suppose a person owns two IRAs, and one IRA owns predominantly stocks that have appreciated a lot and another IRA owns other investments that haven’t done as well. The owner can take all of the RMD from the IRA that owns mostly stocks.
That brings the owner’s overall asset allocation closer to where it was at the beginning of the year, so it is less overweighted to stocks. Other people decide to simplify their financial lives by reducing the number of IRAs they have. So, they take all their RMDs from one IRA until it is depleted and can be closed. The aggregation method can be used only with traditional IRAs.
With 401(k)s and other employment-related accounts, you compute the RMD separately for each account and must take the RMD from that account.
What Happens After the Owner of the Retirement Account Dies?
This is another area in which the RMD rules changed in recent years. One thing that hasn’t changed is the treatment of Roth IRAs and 401(k)s. As mentioned above, while the original account owner is alive, RMDs aren’t imposed on the Roth accounts. But under both the old and new rules, the RMD rules apply to beneficiaries of Roth accounts just as they apply to beneficiaries of traditional accounts.
When a beneficiary who was an individual (and not an estate or trust) inherited a retirement account before 2020, the beneficiary had several options. The beneficiary could distribute the account in full within five years. Or the beneficiary could take RMDs. The life expectancy factor used to compute the RMDs depended on whether the deceased account owner had already reached the RMD beginning age or not.
For most beneficiaries who inherit qualified retirement plans after 2019, there are no RMDs. Instead, most beneficiaries must distribute the entire account within 10 years following the year in which the original account owner passed away. The account can be distributed in any pattern the beneficiary decides but must be fully distributed by the end of the 10-year time period.
The 10-year distribution rule doesn’t apply to all beneficiaries. Exceptions to the 10-year rule are surviving spouses, beneficiaries under age 18, disabled beneficiaries or those with chronic conditions, and beneficiaries who are fewer than 10 years younger than the deceased owner. Beneficiaries in these categories follow the RMD rules that applied to all beneficiaries who inherited accounts before 2020. A surviving spouse has an additional option. He or she can roll over the inherited IRA into an IRA in his or her name and manage it as though it always had been his or her IRA.
When the beneficiary is not an individual, the entire account must be distributed within five years after the original owner passed away. When there are multiple co-beneficiaries, the five-year rule applies if even one co-beneficiary is not an individual.
What Is the Age For Required Minimum Distribution in 2020: Key Takeaways
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