Required Minimum Distributions

Required Minimum Distribution from IRA

What is Required Minimum Distribution for IRA

This is the minimum amount IRS requires retirement savers to withdraw from any tax-deferred savings account each year after reaching the required age (retirement age).IRS charges Ordinary taxes on Required Minimum Distributions(RMDs). This almost ensures you don’t keep your money in a tax-deferred retirement account indefinitely.

As per current rules, you must draw down each year. The same rule applies to younger people with Required Minimum Distributions(RMDs) on inherited IRAs.

Missing a Required Minimum Distribution(RMDs) is very costly as it leaves the pension saver with a 50% tax penalty, including interest, on any amounts not drawn on time.

People with the following tax-deferred retirement savings plan are subject to Required Minimum Distributions(RMDs)

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k) plans
• 403(b) plans
• 457(b) plans
• Profit-sharing plans
• Other defined contribution plans

How do Required Minimum Distributions Work;

The basis for Required Minimum Distribution is;

• Previous year balance in the IRA account and
• Actuarial life expectancy (life expectancy factor).

Divide the previous year’s IRA account balance (December 31) by your current life expectancy factor to determine the current year’s Required Minimum Distribution.

For savers who have more than one IRA account;

• IRS allows distributions from each account or
• Aggregate your Required Minimum Distribution amounts and withdraw from one or more of the accounts.

Please note that you should use the IRS Joint Life and Last Survivor Expectancy Table when determining the RMDs for a spouse (primary beneficiary). The underlying math is the same only that the RMD table is a bit different (based on the ages of both spouses).

First-year RMD can be delayed until April 1 of the following year, but subsequent RMDs must be taken by December 31 of that year.

Age for Required Minimum Distributions

The SECURE Act of 2019 made critical changes on restrictions prohibiting contributions to IRAs or employer-sponsored retirement plans after hitting 70 years (regardless of whether they retire) and also adjusted the RMD age to 72 years (from 70 ½ years if later, the year in which they retire. Though this doesn’t apply in case of a retiree who is a 5% owner of the business sponsoring the retirement plan).

Required Minimum Distribution age in 2022

In 2022 Retirement savers are required to withdraw from their IRA accounts starting at 72 years old (if later, the year in which they retire-this doesn’t apply in case of the retiree being a 5% owner of the business sponsoring the retirement plan). The milestone year is considered as from April 1 of the year after you reach 72 years.

Please be advised that IRS has updated its Actuarial life expectancy tables and retirees can now keep more money in tax-deferred IRA accounts courtesy of lower required minimum distributions (RMDs).

Age for required minimum distribution 2021

For the year 2021 Retirement savers have to withdraw from their IRA accounts starting at 72 years old (if later, the year in which they retire-this doesn’t apply in the case of a retiree who is a 5% owner of the business sponsoring the retirement plan). The milestone year is considered as from April 1 of the year after you reach 72 years.

Please be wary of the 50% penalty, especially in the year 2021. As much as The SECURE Act of 2019 adjusted the RMD age from 70 ½ to 72 years, it’s wrong to assume that a retiree who turned 72 years in 2021 will automatically have the year 2021 as their initial RMD year.

The Act only limited the 72 starting age to retirees who had not hit the 70 ½ milestones in 2019. Essentially, these retirees are continuing their RMD schedule under the old 70 ½ year rules, not beginning under the new age 72 years rules. In short;

• Retirees that turned 72 years in the first half of 2021 are considered to be on the continuing RMD schedule, take your RMDs by December 31, 2021.
• Retirees that turned 72 years in the second half of 2021, take your 2021 RMD by April 1, 2022.

Required Minimum Distribution age 2020

RMDs were temporarily suspended by the CARES Act for 2020 to ease hardships caused by the coronavirus pandemic. The waiver affected retirement savers who turned 72 years in 2020 or were 70 70 1/2 years old before 2020 and inherited IRAs.

Required Minimum Distribution for 2022 | Required Minimum Distribution for 2021 | Required Minimum Distributions 2020

As per the SECURE Act of 2019, two sets of rules essentially apply for inherited IRAs. This act affects the years 2021 and 2022. Which rules to use depends on;

• When the original owner died and
• Type of beneficiary (eligibility- If an eligible beneficiary, old rules apply else new rules apply).
• Type of inherited account(Roth or Traditional IRA)

The CARES Act of 2020 gave some waivers for the year 2020 and as such there will be no RMDs for 2020 from IRAs — whether inherited or not.

Required Minimum Distributions 401k

To determine your 401(k) RMD, You use exactly the same RMD table and follow the same steps as you would when calculating your traditional IRA RMDs. The steps are;

• See where your age falls on IRS Uniform Lifetime Table
• Locate the corresponding “life expectancy factor”
• Divide your previous year’s IRA account balance (December 31) by your current life expectancy factor.

Required minimum distributions Roth IRA

The IRS will not impose RMDs on these savings as long as you are alive. This, however, will change when you die and your other beneficiaries inherit your accounts.

The surviving spouse can inherit a Roth IRA and withdraw any funds tax-free, provided the account has been in existence for at least 5 years else 10% early withdrawal penalty is applicable.

Required Minimum Distributions inherited IRA

Beneficiaries can be;

• Spouse, non-spouse (children, relatives, and unrelated people), or
• Unrelated entities, (trust, estate, or non-profit organization).

Rules for treating an inherited IRA will depend on;

• The date of death of the account holder,
• Inherited account,
• Type of beneficiary.

Beneficiaries are classified as below;

Eligible Designated Beneficiaries

listed as a beneficiary to the account and falls under the below special categories;

1. 1. Spouse of the deceased; or
   2. Minor child of the deceased; or
   3. Dependent of the deceased who is permanently disabled as per IRC 7702B(c)(2)); or.
   4. The sibling who is 10 years younger than deceased

Designated Beneficiaries

listed as the beneficiary of the account but do not fall under any of the special categories above.

 Non-Designated Beneficiaries

This is when the beneficiary only appears in a will or trust.

Please note Death is no excuse for taking RMDs from an IRA! Take out any pending RMDs by December 31 of the same year.

 Eligible Designated Beneficiaries

IRS allows the following categories;

• Permanently disabled dependents and any sibling (10 years younger than deceased) are allowed to take distributions over their life expectancy (RMD based on your age).
• Minors must take the remaining distributions within 10 years of attaining the required age of 18 years (10-year rule).
• Spouses can delay commencement of distributions until the later of the year the deceased would have attained age 72, or the spouse’s required beginning date.

 Most plans, allow for life expectancy rules unless such beneficiaries (Except minors) elect to take distributions using the 5-year rule or the 10-year rule, whichever rule applies.

 The following options are available to a spouse (sole beneficiary) inheriting an IRA from a deceased partner;

Roll into Inherited IRA  

This option involves treating the account as a beneficiary, not as the owner. You can either withdraw in a lump sum or transfer the assets to an “inherited IRA” held in your name.
There is no 10% early-withdraw penalty regardless of age limits.

IRS considers this distribution as gross income for that tax year.

RMDs will be based on the original account holder’s age. However, the spouse can submit revised RMDs based on their own life expectancy.

Change title of inherited IRA (Retitling)

This is when you designate the inherited account to yourself. Technically, you have taken the account as yours and can contribute or withdraw from it. This benefit is only open to spouses. RMDs will be based on the spouse as the original owner.

Any withdrawal before the age of 59½ years attracts an early-withdrawal penalty of 10%.

Roll into your own IRA

If you have a 401K plan, you can roll it into that account. The funds moved into your IRA plan must now follow the rules of the account (Regular RMD rules apply). This option is tax-free.

Transfer any distributions within 60 days of receipt (as long as the distribution is not an RMD).

RMDs for the rolled funds will be calculated using the favorable IRS Uniform Life Expectancy after you hit the milestone of 72 years (a major advantage is the ability to defer RMD until the spouse is 72 years). These funds can also be accessed at any age but face the 10% IRS early-withdrawal penalty if 59½ years.

Designated Beneficiaries

A Parent to child transfer is the most common non-spouse situation. In General, IRS requires a designated beneficiary to liquidate the account within 10 years following the death of the original IRA account holder (10-year rule).

IRS allows the beneficiary to take distributions of any amount at any time.

You can, however, move the account into an inherited IRA.

RMD requirements will be based on the date of the original owner’s death. For pre-December 31, 2019-use Single Life Expectancy Table(Stretch IRA), and post-December 31, 2009-distribute as per the 10-year rule.

Non-Designated Beneficiaries

The 5-year rule applies to non-individual designated beneficiaries (as of September 30 of the year after the account holder’s death).

If the owner was still alive by the April 1 of the 72-year milestone, the distributions to non-individual beneficiaries will be based on the single life expectancy table of the account holder.

Bottom line

Avoid taking two distributions in a year. This can happen if a late first distribution is taken(by April 1-following year) then a second distribution is taken by December 31 of the same year. This will land you in a higher tax bracket.

Lastly, determine whether it’s more advantageous for you to access certain accounts or investments before others.