Get the Facts About Required Minimum Distributions
- You have to take a required minimum distribution from most types of retirement accounts after you turn 72. Learn about the rules to avoid tax penalties.
After you turn 72 years old (or if you reached 70 years and 6 months prior to 2020), you have to withdraw a required minimum distribution (RMD) from your retirement account every year. The IRS charges penalties if you fail to meet your annual RMD, which is calculated based on various factors.
How Do Required Minimum Distributions Work?
RMD applies to 401(k), 403(b) and 457(b) employer-sponsored retirement accounts and to SIMPLE, SEP and traditional individual retirement accounts. Roth IRAs require minimum annual distributions only after the account holder dies.
To figure out your annual RMD, find the balance of your account at the end of last year. Then, check the IRS life expectancy table to find the RMD factor based on your age. Divide the end-of-year account balance by the RMD factor to get your RMD for the current year.
The IRS publishes two different life expectancy tables. Most people use the Uniform Lifetime Table. You may use the Joint Life and Last Survivor Table instead if you're married and 10 or more years older than your spouse.
What Other Rules Apply to RMD?
Previously, RMDs began at age 70 1/2. The passage of the Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the SECURE Act, changed the RMD age to 72. You have until April 1 of the year after you turn 72 to take your first RMD. If you push this first distribution back, however, you'll have to take a second distribution before December 31 of the same year.
Many people have multiple retirement accounts. In this case, you figure out the RMD for each account separately rather than adding all the balances together. However, if you have multiple IRAs, you can use an exception to take your entire yearly distribution from just one of your IRA accounts.
How Can I Avoid Tax Penalties for Missing an RMD?
When you miss an RMD payment, the IRS charges half the missed amount as a penalty on your tax return for that year. In other words, if you only withdrew $8,000 of a required $12,000 RMD, you would owe half of $4,000, or $2,000, when tax time arrives. You can reduce your risk of incurring these costly fees by withdrawing a bit more than your RMD each year to prevent issues.
If you do get a 50% RMD penalty, you can ask the IRS to waive this fee by filing IRS Tax Form 5329, "Additional Taxes on Qualified Plans (Including IRAs) And Other Tax Favored Accounts." The IRS will notify you within a few months if you qualify for a waiver.
Another common issue occurs when RMDs push you into a higher tax bracket. This, in turn, increases the amount you owe for your federal taxes and could even cause your Medicare Part B and Part D monthly premiums to rise. You can possibly avoid this issue by taking your first RMD as soon as you turn 72, so you don't dramatically increase your income with two distributions in the same year.