Required Minimum Distributions (RMDs): What to Know

One common concern among our retired and pre-retiree clients is how we will manage the Required Minimum Distributions (RMDs) that need to occur from their pre-tax retirement accounts. Required Minimum Distributions (RMDs) are withdrawals from retirement accounts with late withdrawals potentially incurring penalties.

Since the money has been in a pre-tax retirement account and growing over time, the U.S. Government has likely never collected a tax dollar from those amounts. We believe RMDs are the government’s way of forcing withdrawals in order to generate tax revenue from these accounts.

RMD rules generally require account owners to begin taking distributions from certain retirement accounts once they reach the applicable required beginning age (IRS) and clients tend to become more and more concerned about these withdrawals as they approach this beginning age. We do our best to account for RMDs and the tax implications are included in our long-term retirement plans.

How Do Roth Conversions Relate to RMD Planning?

This is one reason why we also commonly discuss Roth Conversions with clients as Roth funds do not have the RMD implications since the government has already collected their tax revenue. You can read more about Roth Conversions in our previous blog at Summit.

How Are Required Minimum Distributions Calculated?

The RMD amount for the year is based on the previous year balance and the age of the owner. The larger the account balance is and the older the account owner is, the larger the annual RMD will be.

There are plenty of available calculators online that are able to help you determine what your annual RMD is such as Schwab but the IRS also publishes their life expectancy tables as well. Because individual circumstances can affect the calculation, consider confirming the amount with your retirement plan administrator, IRA custodian, or tax professional.

Can Required Minimum Distributions Be Taken From One Account?

One important thing to note is that the RMD requirement applies to all of the owner’s pre-tax retirement accounts, but sometimes the withdrawals are allowed to come from one account if preferred (IRS) by the owner. This means that if Account A has a $10,000 RMD and Account B has a $5,000 RMD then the owner could take the full $15,000 RMD from Account A and it would satisfy their full requirement.

Can Regular Retirement Withdrawals Satisfy RMD Requirements?

Since RMDs are just forced withdrawals, those who are withdrawing from their pre-tax retirement accounts to satisfy their retirement needs may not need to worry about additional RMD withdrawals. For example, if this same owner withdraws $2,000 per month for recurring needs then this $24,000 would be more than necessary to satisfy their RMD need. This strategy does depend on the specific account types in question as various IRA accounts usually allow for aggregating RMDs but 401(k) plans may have their own specific RMD threshold.

What Are the RMD Rules for Inherited Retirement Accounts?

One other important note that we want to address is that RMDs may be applied to inherited accounts as well. Depending on the owner of the retirement account, both pre-tax and Roth accounts, then the beneficiary may have RMD implications to plan for.

Some beneficiaries may need to withdraw a minimum amount every year and withdraw the full balance before the end of 10 years. Some may need to simply make RMD withdraws based on their own personal life expectancy. The driving factors behind the amount and the timeline of inherited retirement RMDs is the age of the original owner, the age of the beneficiary, and the date of death of the original owner. Different dates/ages have different implications on the inherited retirement RMDs (Investopedia). Once again, because individual circumstances can affect the calculation, consider confirming the amount with your retirement plan administrator, IRA custodian, or tax professional.

Key Takeaways

• Required Minimum Distributions (RMDs) are withdrawals from retirement accounts with late withdrawals potentially incurring penalties.
• The RMD amount for the year is based on the previous year balance and the age of the owner.
• RMDs are commonly associated with pre-tax retirement accounts, but they could be imposed on inherited retirement accounts as well.

Have Questions About RMDs and Retirement Planning?

If you have any questions about retirement, your individual investment portfolio, our 401(k)-recommendation service, or anything else in general, please give our office a call at (586) 226-2100.

Please feel free to forward this article to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or your overall financial situation, please give us a call so we can discuss it.

We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.

Best Regards,

Zachary A. Bachner, CFP®
with contributions by Robert L. Wink, Kenneth R. Wink, James D. Wink, and James C. Baldwin

Additional Disclosure:
This material is provided for informational and educational purposes only and is not intended to provide individualized investment, tax, or legal advice. RMD and tax rules are complex and may change. Individual circumstances, account types, beneficiary designations, and other factors may affect the application of these rules. Consult with your qualified tax or legal professional regarding your specific circumstances.