Understand the nuances and rules of RMD planning and how to avoid potential tax penalties.
A key part of retirement income planning is understanding which types of income are subject to the IRS required minimum distribution (RMD) rule. This rule requires investors to take minimum distributions out of certain retirement accounts once they’ve reached a specific age.
However, IRS rules around RMDs can be complex and result in tax penalties if not followed correctly. Further, it’s not uncommon for RMDs to increase your tax liability.
As you near retirement, we can help you avoid higher taxes, as well as potential penalties, by working with you to create a tax-efficient withdrawal strategy.
Here are answers to commonly asked questions about RMDs.
What is an RMD?
Across qualified retirement plans such as IRAs, 401(k), 403(b) and 457(b) plans, the IRS does not allow investors to maintain balances indefinitely. As such, federal law mandates that a minimum amount must be withdrawn each year, beginning at a certain age. This amount is known as a required minimum distribution, or RMD.
What is my RMD age?
Your RMD age depends on the year you were born.
| Year born | RMD AGE |
| 1951-1959 | 73 |
| 1960 or later | 75 |
When am I required to take my RMDs?
Once you reach your RMD age, you are required to take them by these deadlines:
- The year you reach your RMD age: You must take your RMD by April 1 of the year after you reach your RMD age.
- The years after you reach your RMD age: You have until Dec. 31 to take your RMD each year.
When should I begin taking my RMDs?
While some plans allow you to delay an RMD until you retire, the simplest approach for many individuals is to take the first RMD by Dec. 31 in the year they reach their RMD age and continue taking RMDs by Dec. 31 every year after that. With this approach, you do not have to take two RMDs in the year following the year you reach your RMD age.
How are RMDs calculated by the IRS?
Your RMD amount is usually based on the IRS Uniform Lifetime Table and the fair market value or entire interest value of your retirement account on Dec. 31 of the prior year.
RMDs are determined separately for each of your retirement plans and are required per individual, not per couple. If you have a spouse who is more than 10 years younger than you and who is the sole beneficiary of your account, a different life expectancy table is used, which can allow for a smaller RMD. In each case, the RMD is calculated by dividing the year-end account value by the applicable life expectancy factor. Calculations for inherited IRAs are different and depend on several factors — please see IRS Publication 590-B.
How do I determine my RMD amount?
Contact each company that holds a qualified retirement account to confirm your RMD requirement for the year from each account. Work with my team and your tax professional to help ensure you know what you need to take out and have a plan for when you will take the distributions.
Required minimum distribution (RMD) calculator
Use this tool to determine the amount of your RMD.
Run the numbers
What retirement accounts are subject to RMDs?
| RMD rules apply | RMD rules do not apply |
- Traditional IRAs
- SEP IRAs
- SARSEPs
- SIMPLE IRAs
- Inherited IRAs
- Inherited Roth IRAs
- Profit-sharing plans
- 401(k)
- 403(b)
- 457(b)
| - Roth IRA
- Roth 401(k)
- Non-qualified annuities
|
How do I take my RMD if I have more than one retirement account? Can I combine my RMDs?
If you have more than one type of retirement plan, your ability to combine RMDs will depend on the account.
Accounts where RMDs must be taken separately
Your RMDs must be calculated separately for each of the following accounts, even if you have more than one account within a type:
- 401(k) plans
- Profit sharing and some other types of employer-sponsored plans
- Inherited IRAs
- Inherited 403(b) plans
For example, if you have two 401(k) plans and two inherited IRAs, you will generally need a total of four withdrawals to satisfy your RMD requirements.
Accounts where you can combine RMDs
If you have more than one account within any of the following plan types, you can combine your RMD and take the distribution from one or all of your accounts of the same plan type.
- Traditional, SEP or SIMPLE IRA
- 403(b) plans
Note: You cannot satisfy the RMD for your IRA with a distribution from 403(b) or vice versa.
Are there ways to avoid or reduce my distribution requirements?
There are strategies you can leverage, but consult your Ameriprise financial advisor or a tax professional on whether they are appropriate for your unique situation:
- Consider strategic withdrawals from pretax accounts: Though you are not required to take distributions until your RMD birthday, if you are taking income from your assets, you can consider taking distributions from your pretax accounts as soon as you are able to, at age 59½ for most people unless a specific exception applies. This strategy allows you to spread out your taxable income over time, reducing a large jump in taxable income when you start taking RMDs. This can impact your overall tax bracket and how much you pay for Medicare.
- Consider a Roth conversion: Traditional IRAs and 401(k) plans are subject to RMDs, so you may want to convert some assets to a Roth IRA or Roth 401(k) to avoid distribution requirements for future years. Conversions of pretax assets to a Roth IRA are taxable, so before doing so, be sure to consider all the relevant issues. Note that RMD amounts are not eligible for conversion.
- Consider a qualified charitable distribution (QCD): If you are 70½ or older, you can make a QCD, which is a nontaxable distribution from an IRA sent directly to an eligible charity. If you are subject to RMDs, it will count toward your RMD for the year — and neither you nor the eligible charity will have to pay income taxes.
- If you’re working: If you are still working when you reach your RMD age and you are not a 5% or greater owner of the business, you may be able to postpone your RMD from the employer-sponsored retirement account with the employer you currently work for until you retire. This exception does not apply to IRAs, including SEP and SIMPLE IRAs.
Are RMDs required for Roth IRAs? What about inherited Roth IRAs?
RMD rules do not apply to the original Roth IRA owner. However, if you are an owner of an inherited Roth IRA, your distribution requirements depend on whether you were a spouse or non-spouse beneficiary, the year you inherited the account, if you meet certain exception criteria and how you choose to treat your inherited account.
For example, spouse beneficiaries can move the assets to their own Roth IRA instead of an inherited Roth IRA to avoid RMDs.
How can I avoid tax penalties?
The only way to avoid tax penalties is to adhere to federal law and ensure you’re withdrawing the correct RMD amount from the correct retirement accounts by the deadline.
If you do not take a distribution or withdraw less than the required amount, you may have to pay a penalty of up to 25% of the amount not taken. The penalty is reduced to 10% if the shortfall is corrected within two years. You can take more than the required amount, but the extra withdrawals don't count toward RMDs for future years.
Generally, withdrawals of pretax contributions and earnings are taxed as regular income. If you have after-tax money in your IRA or employer plan, those distributions will still count toward your RMD but won’t be taxable and are distributed pro-rata with pretax contributions.
We can help you manage your RMDs
RMD rules can be difficult to understand. We are committed to helping you create a retirement income withdrawal strategy that manages the impact of these required distributions.