Required Minimum Distributions, Original Owner Plans
by: Michael Snowdon, CFP®, CRPC®
Everyone who uses tax-deferred retirement investment accounts benefits from a nice aspect of the tax code. Years ago, Congress agreed to support Americans in their effort to accumulate money to provide income in their retirement period. The result was the development of tax-deferred employer-provided plans like 401(k) and 403(b), and IRAs for individual saving and investing. The tax-deferral allows plan assets to grow more than if taxes were being assessed along the way.
There is a drawback, however. Tax-deferred does not mean tax-free. Eventually, participants must pay taxes on money in tax-deferred accounts. The way the IRS governs this is to require minimum distributions from those accounts. Required minimum distributions (RMDs) are based on your age, the type of plan, whether you inherited it or not, along with the amount of money in your tax-deferred accounts. RMDs are the minimum amount individuals must withdraw from tax-deferred accounts each year.
What’s important to know about RMDs? First, when required, participants must begin taking RMDs once they reach age 72 (age 70½ if born before July 1, 1949) or retire (if the plan allows this). As an example, if you are retired and your 72nd birthday was June 30, 2019. You must take your first RMD (for 2019) by April 1, 2020. You will take subsequent RMDs on December 31st annually thereafter. Notice, though, the CARES Act eliminated the RMD requirement for 2020, so the example above is just that – an example and not applicable specifically for 2020.
How much will you need to withdraw? The amount can vary depending on whether you inherited an account or if you are the original owner. Additionally, the amount changes each year as you get older. The IRS has tables to help you know how much to withdraw. Also, plan custodians often will provide that information. Here’s an example of how it may work for you. Assume you are 72 and need to take your first RMD. Let’s also assume you have an account balance as of December 31 the previous year of $200,000. Looking at IRS Table III (uniform lifetime), the distribution factor is 25.6. this means you divide the account balance as of December 31 last year by the distribution factor to determine the RMD amount: $200,000 divided by 25.6 = $7,812.50. (NOTE: the IRS has proposed making changes to lifetime distribution tables in 2021, so the RMD table amount may change.)
If you do not withdraw the required RMD the penalty is stiff. You will have to pay the IRS 50% of any unpaid RMD amount. As a result, it’s a very good idea to take the required amount each year. If you inherit an IRA or employer-provided retirement account distribution requirements are different. We will look at the differences in another article. Also, qualified distributions from
Roth accounts are not taxable, and they do not have RMDs. For more information, please visit the IRS' website:
IRS guidance on RMDs: https://www.irs.gov/publications/p590b#en_US_2019_publink1000231258
IRS lifetime distribution tables:https://www.irs.gov/publications/p590b#en_US_2019_publink1000231258