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Your RMD Questions, Answered

Jaron Carmichael, CFP®, AIF®

Director of Retirement Group, Wealth Advisor

Summary

We have answers to RMD questions, so you can help simplify retirement planning, make informed decisions, and steer clear of penalties.

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Many types of qualified retirement accounts, including individual retirement accounts (IRA) and 401(k), can help allow you to invest money and benefit from delayed taxation of the growth and income. But money can’t sit in a retirement account forever, so retirees at a certain age are required to take money out. These withdrawals—called required minimum distributions (RMDs)—are when the IRS collects the tax on growth and income. If you think the rules are confusing, you’re not alone. In fact, we receive many questions about RMDs. Here are the most frequently asked:

 

Question: What is a required minimum distribution (RMD)?

Answer: An RMD is the annual amount that the government expects you, as a retiree, to withdraw or transfer from an IRA, 401(k), or workplace retirement account so it can be taxed.1 You can always withdraw more than the required minimum amount, but withdrawing less will subject you to federal penalties.

By design, RMDs and the taxation of them are spread out over your remaining lifetime. This is the government’s attempt to ensure that individuals don’t leave funds in tax-advantaged accounts indefinitely, avoiding taxation and passing on the retirement funds to their heirs. In other words, RMDs prevent indefinite deferral of taxes, allowing the government to collect revenue on the funds.

 

Question: What if I fail to distribute the minimum amount required?

Answer: The penalty for not taking an RMD is a 25% excise tax on the amount that was required but not distributed. The penalty is calculated and paid with your income tax return. Since passage of the SECURE 2.0 Act, you can now self-correct an RMD failure by withdrawing the funds and paying the related tax within two years. Doing so can qualify you for a reduced 10% excise tax penalty.

 

Question: Which types of retirement accounts have RMD rules?

Answer: Traditional IRAs, Simplified Employee Pension (SEP) IRAs, SIMPLE IRAs, pension plans, profit-sharing plans, 401(k), 457(b), 403(b), and qualified stock bonus plans are all subject to RMD rules.

 

Question: Do the RMD rules apply to a Roth IRA?

Answer: You don’t have to take RMDs from a Roth IRA as long as you are alive. A beneficiary who inherits your Roth IRA is generally required to take minimum distributions. Beginning in 2024, participants in employer-sponsored Roth retirement plans, including Roth 401(k) and Roth 403(b) accounts, also do not have to take RMDs during their lifetime.

 

Question: When do I need to take RMDs?

Answer: Under today’s rules, the owner of a qualified retirement account must take their first RMD for the year in which they turn 73 years of age2. You’re allowed to delay taking the first RMD until April 1 of the following year. So, if you turned 73 in 2023, you have until April 1, 2024, to take the first RMD. Generally, RMDs are required to be completed by Dec. 31 in every year thereafter, until the account is reduced to zero.

There’s a catch: If you delay the first RMD to the following year, you’ll still need to take a distribution for the second year. Delaying will therefore increase your taxes that year. To avoid having too much taxable income, you may decide to take the first RMD in the same year you reach age 73. Since timing of RMDs is essential, talk with your tax planner or financial advisor for guidance.

Another exception is for workplace retirement accounts such as a 401(k) and 403(b). If you’re still employed and participating in your employer’s retirement plan after age 73, you can delay taking RMDs until the year you retire. For this exception to apply, however, you cannot own more than 5% of the company.

Here are a few of examples to illustrate the timing of RMDs:

Example 1: You have a traditional IRA and reached age 73 on Nov. 25, 2024. You can take your first RMD by Dec. 31, 2024, or you can wait until April 1, 2025. If you wait, you’ll need to take two distributions in 2025—one for 2024 and another for 2025. Both distributions will be included in your 2025 income tax return.

Example 2: You reached age 73 in 2023 and have a balance in two different 401(k) accounts. One 401(k) is with the company where you currently work; you don’t have an ownership stake in the company, and you intend to work there until retirement in 2025. The other 401(k) is with a previous employer. In this scenario, you can delay taking an RMD from your current employer’s plan until April 1, 2026, but you must take the first RMD from the previous employer’s plan no later than April 1, 2024.

Example 3: You own more than 5% of a company and were working there when you reached age 73 on Dec. 19, 2023. Even though still working, you must take your first RMD by April 1, 2024, because of the rules related to your ownership stake in the company.

 

Question: How do I calculate RMDs?

Answer: For most people, the calculation is simple. Divide your retirement plan balance at year-end by the life expectancy factor in the IRS tables. Your RMD for the current year will be calculated using your balance on Dec. 31 of the previous year. There are a couple of exceptions:

  • Exception 1: If your spouse is 10 years younger and your only beneficiary, you receive a longer payout period as determined by the Joint Life and Last Survivor Expectancy table.
  • Exception 2: RMDs from an inherited IRA or an inherited employer-sponsored retirement account will use a different calculation.

 

Question: What if I have multiple IRAs or retirement plan accounts?

Answer: If you have multiple retirement plan accounts, the RMD must be calculated and taken separately for each account. If you have multiple IRAs, you can take the combined RMD total from any one of those accounts. RMDs from an inherited IRA, however, must be calculated and distributed separately from your own IRAs.

 

Question: Can annuities satisfy the required minimum distribution?

Answer: Annuity contracts purchased in an IRA or employer-sponsored retirement account can satisfy the RMD rules when certain conditions are met, including: payments are made annually or more frequently, the annuity was purchased before RMDs begin, or the payout period is no lengthier than permitted under RMD rules.

 

Question: How are required minimum distributions taxed?

Answer: Distributions from a traditional IRA or pre-tax retirement account are generally subject to federal and state income taxes (ordinary rates) for the year in which you take the distribution. The distribution amount will be reported on a Form 1099-R and included with your personal income tax return for that year.

If you’ve made after-tax or contributions to your IRA or employer-sponsored retirement account, then a portion of the distributed funds may not be taxed.

 

Question: Can I reduce or avoid taxes by distributing to a charity?

Answer: If you’re at least 70½ years old, you can exclude up to $100,000 in gross income from your tax return every year by using qualified charitable distributions (QCDs) to make tax-free donations. QCDs not only benefit charities but also count toward an RMD that would otherwise be taxed.

To receive these tax-free benefits, make sure to inform your CPA or tax preparer about the portion of distributions made directly to charity. Distributions reported on Form 1099-R don’t usually indicate the amount of distributions that were made tax-free to charities.

Can you take a distribution and then make a charitable donation? Of course. But utilizing a QCD will exclude the donation from your gross income, which will reduce the adjusted gross income (AGI) amount that’s used in several tax calculations. The additional taxes for a higher AGI may be more than your tax deduction for itemized charitable contributions. Also, QCDs provide the benefit of income exclusion even if you take the standard deduction rather than itemize.

 

Question: What about an inherited IRA or inherited employer-sponsored retirement account?

Answer: After your death, beneficiaries will be required to take distributions from any IRA or workplace retirement account they inherit. A surviving spouse can usually roll over an inherited IRA or inherited workplace account to an account in their name and take RMDs based on their age. Non-spouse beneficiaries have different rules based on multiple factors, such as age, their relationship to you, and whether they’re an individual or trust.

Knowing when to take required minimum distributions from a qualified retirement account can be confusing. If you still have questions, our financial advisors are available to help you make informed decisions and develop a strategy that fits your overall financial plan and long-term goals. Need help? Let’s talk.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

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