Required Minimum Distributions: 5 RMD Rules You Need to Know

Required Minimum Distributions: 5 RMD Rules You Need to Know
18 Oct 2018
If you’re over age 70 1/2 and you have retirement accounts, you’ll need to understand required minimum distributions. Here are the RMD rules you need to know.

Have you reached the golden age of 70 and a half?

If so, you should make sure you understand the basic RMD rules.

If you’re not familiar with the term, RMD stands for required minimum distribution. Your RMD is the minimum amount you need to withdraw from your retirement plan account on an annual basis.

Of course, RMDs come with their own specific sets of regulations. Here are the main things you need to know about withdrawing them.

1. Types of Retirement Plans

First of all, not every retirement plan requires RMDs.

As it stands, the RMD regulations apply to most employer-sponsored plans. This includes 401(k) plans, 403(b) plans, 457(b) plans, and profit-sharing plans. These regulations also apply to IRA-based plans such as SEPs and SARSEPs.

Moreover, the RMD regulations apply to Roth 401(k) plans. As for Roth IRAs, the regulations don’t apply to them if the owner is alive.

2. Receiving an RMD

When it comes to receiving your RMDs, the rules are quite clear.

According to the IRA, you have to take your first RMD by April 1 of the year after you turn 70 and a half. After that, you’ll need to take your RMD by December 31st of each year. This includes the year in which you took your RMD by April 1st.

3. IRA Ownership

As you may know, IRA distributions come with certain benefits.

If you’re an IRA owner, you need to calculate the RMDs for each of your IRAs separately. However, you can withdraw the total amount from any IRAs you may have. The same principle applies to 403(b) contract owners.

As for 401(k) and 457(b) retirement plans, they don’t have this option. With these plans, you have to withdraw your RMDs from each account separately.

4. Calculating Your RMD

At first glance, estimating your RMD may seem complicated. In truth, these calculations are quite simple.

To calculate your RMD, you need to divide your end-of-year balance with the appropriate life expectancy factor. These factors are set by the IRS, and they’re based on the tables in Publication 590-B.

Depending on your situation, you’ll need to choose between three life expectancy tables. These are the Joint and Last Survivor Table, the Uniform Lifetime table, and the Single Life Expectancy Table.

5. Missing the Deadline

If you fail to withdraw your RMD by the applicable deadline, you’ll face a penalty.

In this situation, the RMD penalty is equal to 50% of the amount not withdrawn. The good news is that avoiding this penalty is relatively simple. All you need to do is establish that the shortfall was due a “reasonable error.”

To do that, you’ll need to take immediate action upon realizing that you missed your RMD. First, calculate the shortfall and remove that amount from the IRA. Then, file Form 5329 and include a letter of explanation.

More on RMD Rules

One final thing you should keep in mind is that you’re allowed to withdraw more than the RMD. Of course, most withdrawals get included in your taxable income. This doesn’t apply to qualified distributions from Roth IRAs, which are tax-free.

Want to know more about some of the finer details of RMD rules? Interested in other retirement planning topics? Take a look at our blog!


Daryl Seaton