IRS Required Minimum Distributions

Retirement plans, like IRAs and 401(k) plans, allow you to save for your future. However, if you don’t follow the IRS required minimum distribution rules, you might receive tax penalties for not starting to withdraw your money by a certain age.

If you’re an IRA beneficiary, the rules are different. Review our inherited IRA article for details.

Required Minimum Distribution (RMD) Requirements for IRAs and 401(k)s

What are the IRS Required Minimum Distribution rules you need to know about?  In general, once you reach the right age, you must take money out of your retirement plan bit by bit each year. That sounds simple, but the details are important.

To take a closer look, let’s go over the specifics to clarify the following: age, required, and minimum.

AGE – Review the new required minimum distribution rules

The age milestone for the Required Minimum Distribution rules changed with the 2019 SECURE Act, so it’s helpful to look at birthdates to know which timeline to follow for your 401(k) or Traditional IRA withdrawals.

If you were born:

• June 30, 1949 or before: You can take your first RMD in the year you turn 70 ½. You can delay the first RMD that year, but then you must take it by April 1 of the year after you reach age 70 ½.
• July 1, 1949 or after: You can take your first RMD in the year you turn 72. You can delay the first RMD that year, but then you must take it by April 1 of the year after you reach age 72.

Keep in mind, if you don’t take an RMD in that first year, you’ll have to take two distributions the next year. After that, you’ll need to take a Required Minimum Distribution each year to stay in line with the IRS rules.

REQUIRED – Understand RMD requirements

IRS required minimum distributions are not optional. If you don’t take or forget to take the minimum amount each year, you’ll likely have a 50% penalty on your hands for the amount not distributed.

Let’s say your RMD amount for last year was $6,000, but you only took out $2,000. That means you had another $4,000 left to withdraw — that amount is subject to the 50% penalty. In other words, you’d lose $2,000 to the required minimum distribution penalty.

MINIMUM – Know how much your Required Minimum Distributions are

Minimum withdrawal amounts are based on life expectancy. So, first figure your required minimum distribution using IRS life expectancy tables. You can find those on the IRS website.

Then, you can take the full amount from just one retirement account or from several accounts. You can also choose to take it all on one day in the year or spread it out over several distributions.

Some banks and investment plans will offer automatic options, so you don’t have to remember to request the distribution.

What if you don’t need the money to live off at the moment? Is a rollover a possibility for avoiding a penalty? Unfortunately, no. IRS required minimum distributions aren’t eligible for rollover. You must pay tax on them.

Need help with Required Minimum Distribution rules?

Understanding RMD rules can get tricky, but it’s important to know you’re following them so you can avoid costly penalties. You can always check with a tax pro for help.

If you’re wondering about your RMD for 2020, check out our article on the CARES Act waiver for 2020 RMDs.