Required Minimum Distributions

Contents

1. Where the rule came from
2. How the amount is calculated
3. Deadlines, accounts and the first year
4. Inherited accounts and the ten year rule
5. What the subject cannot do

Brent O’Mara has celebrated business transitions and retirements with clients, and a few years into many of those retirements the tax code sends a reminder that the subject of this entry has arrived. The term is the Internal Revenue Service’s own. A required minimum distribution, which the agency abbreviates to RMD, is the smallest amount that must be withdrawn from a retirement account each year once the owner reaches a set age; the owner may always take more, and the withdrawal is taxable income except for any part taxed before or received as a qualified Roth distribution.¹ The word required is the point. Retirement accounts were created to fund retirement, not to pass wealth untaxed to the next generation, and Congress wrote rules forcing annual withdrawals so that the tax deferred for decades would eventually be collected.⁴

Where the rule came from

The starting age first became law in 1986, at 70 and a half, and stayed there for more than three decades.⁵ The SECURE Act raised it to 72 for anyone born on or after July 1, 1949, the first change since the rule was written, and a January 2020 column on the new law noted that it also ended the practice of stretching inherited accounts over a non spouse beneficiary’s lifetime.⁵ A second increase followed, and the IRS now states the rule as it stands: withdrawals from traditional, SEP and Simple IRAs and from 401(k), 403(b), 457(b), profit sharing and other defined contribution plans generally must begin at 73.¹ Roth IRAs are the exception during the owner’s life, along with designated Roth accounts inside workplace plans, though beneficiaries of Roth accounts are subject to the rules after the owner dies.¹ The older rule remains visible in 2017 guidance that still speaks of 70 and a half and in a 2019 explanation of why a Roth 401(k) was once rolled to a Roth IRA to escape the requirement.⁶⁴

Figure

IRAs beside workplace plans

	IRAs, including SEP and Simple IRAs	401(k) and other defined contribution plans
First deadline	April 1 of the year after turning 73, even if still employed	April 1 after the later of turning 73 or retiring, if the plan allows; 5 percent owners get no delay
Several accounts	calculate each, then withdraw the total from any one or more	calculate and withdraw separately from each plan, except that 403(b) accounts may be combined
Who calculates	the owner, with IRS worksheets and tables	the plan administrator should
Missed amount	25 percent excise tax, 10 percent if corrected within two years	the same

How the amount is calculated

The arithmetic is a division. The required amount for a year is the account balance at the end of the preceding calendar year divided by a distribution period taken from the IRS Uniform Lifetime Table; a different table applies when the sole beneficiary is the owner’s spouse and more than ten years younger, and a single life table applies to most non spouse beneficiaries.¹ A 2019 column by a retirement researcher illustrated it with an account holding 200,000 dollars at the previous year end and an owner turning 73, whose factor in the table then in force was 23.8, producing a required withdrawal of 8,403.36 dollars.⁴ Because the owner cannot change the divisor, the only way to shrink a required withdrawal is to shrink the balance, whether by earlier withdrawals, by a conversion to a Roth account or by giving part of the amount to charity.⁵ The SEC’s investor site offers a calculator for the traditional IRA and 401(k) case and points to IRS Publication 590 for everything else, including the younger spouse table.³

Figure

How the amount is found

1. 01
   BalanceTake the account balance as of December 31 of the preceding year.
2. 02
   TableFind the distribution period for the owner's age in the Uniform Lifetime Table, or in the joint table if the sole beneficiary is a spouse more than ten years younger.
3. 03
   DivideDivide the balance by that period; the result is the minimum for the year, and more may always be taken.
4. 04
   ReportThe withdrawal is taxable income except for any basis or qualified Roth amounts.

Deadlines, accounts and the first year

The first withdrawal is due by April 1 of the year after the owner turns 73; every later one is due by December 31.² The IRS example is a person who turns 73 on July 15, 2024, whose first withdrawal, for 2024, is due by April 1, 2025, whose second, for 2025, is due by December 31, 2025, and so on each year.² Waiting until April 1 therefore means two taxable withdrawals in one calendar year, which the agency notes can be avoided by taking the first one by December 31 of the year the owner turns 73.¹ Workplace plans differ from IRAs in two ways. A plan may let a participant who is still employed delay until April 1 after retirement, unless the person owns 5 percent or more of the company, while an IRA allows no such delay; and an owner with several IRAs may add up the required amounts and take the total from any one of them, while each workplace plan must be satisfied on its own.²⁶ Kiplinger added two practical points: a person over the old threshold could transfer up to 100,000 dollars a year directly from an IRA to charity, counting toward the requirement without entering adjusted gross income, and no such transfer was possible from a 401(k).⁶ Missing a withdrawal, or taking too little, brings a 25 percent excise tax on the shortfall, reduced to 10 percent if corrected within two years, reported on Form 5329.¹

Figure

The dates and the penalty

deadline for the first withdrawal, in the year after the owner turns 73

April 1

deadline for every withdrawal after the first

December 31

excise tax on any amount not withdrawn, reduced to 10 percent if corrected within two years

25 percent

Inherited accounts and the ten year rule

After an owner dies the rules change shape. The withdrawal for the year of death is whatever the owner had been required to take and had not, and from the following year the amount depends on who the beneficiary is.¹ Under the SECURE Act most non spouse beneficiaries must empty an inherited account by the end of the tenth year after the owner’s death, and in 2024 the IRS issued final rules settling a question that had puzzled advisers for five years: beneficiaries who inherit from an owner who had already reached the required age must also take annual withdrawals during those ten years, while those who inherit from an owner who had not reached it have more freedom about timing but face the same deadline.⁸⁷ Eligible designated beneficiaries, among them surviving spouses, minor children, people who are disabled or chronically ill and anyone not more than ten years younger than the owner, are generally exempt from the ten year rule and may stretch withdrawals over their own lives, and a surviving spouse may roll an inherited IRA into her own.⁸⁷ For the years 2021 through 2024 the agency waived the annual withdrawals for beneficiaries caught by the confusion.⁸ The 2020 column observed that the end of the stretch made a large traditional IRA a less effective way to leave money to adult children in their peak earning years, since inheritances held in taxable accounts carry no withdrawal clock and receive a step up in basis.⁵ How any of this fits a particular estate depends on individual circumstances, which qualified professionals rather than a reference entry should weigh.

What the subject cannot do

A required minimum distribution sets a floor, and nothing else. It cannot tell an owner how much to spend, only how little to withdraw; it cannot be banked against a future year, since excess withdrawals never count toward later requirements; and it cannot be waived by a plan document, which may in fact demand withdrawals at 73 even from someone still employed.²¹ The IRS comparison chart adds two small reliefs: the annual amount may be taken in any number of withdrawals through the year so long as the total is met by the deadline, and for a workplace plan the sponsor or administrator should calculate the figure, where an IRA owner must do the sum alone.² It also cannot see a tax return. The 2020 column warned that large required withdrawals can push a retiree into a higher bracket and raise Medicare Part B and D premiums, which in that year rose by 70 dollars per person per month for couples with income above 174,000 dollars, measured from the return of two years earlier.⁵

Figure

The IRS table read as a spending guide

• Age 653.13
• Age 754.37
• Age 856.76

What the table can do, oddly, is serve as a spending guide. Anthony Webb of the Center for Retirement Research tested the IRS schedule as a guide for retirees afraid to spend their savings and found that it held up well against a far more complex standard, allowing withdrawals of 3.13 percent of assets at 65, 4.37 percent at 75 and 6.76 percent at 85, plus interest and dividends, with the percentages applied to the current balance rather than to the starting one as the four percent rule does.⁹ The Stanford Center on Longevity and the Society of Actuaries built a strategy on the same idea, combining a well timed Social Security claim with withdrawals set by the IRS table, and found it compared favorably with 292 other retirement income strategies.¹⁰ What none of these can do is remove the risk that comes from the order in which market years arrive, which is the subject of the next entry.