Required Minimum Distribution
Required Minimum Distributions (RMDs) are the minimum amount you must withdraw from your tax-deferred accounts every year starting at age 70 1/2. Your IRA, SEP IRA, SIMPLE IRA, and retirement plan account are subject to the RMD rules, but Roth IRAs do not require withdrawals until after the death of the owner.
The RMD rules set a floor or minimum amount for your withdrawals, but you can withdraw more than the minimum required amount. Like all withdrawals from your tax-deferred accounts, withdrawals meant to satisfy the RMD rules are part of your taxable income.
How does the IRS calculate RMDs?
The IRS starts by determining your IRA (or other applicable account) balance at December 31 of the prior year. Your age corresponds to a specific distribution period. Below is the Uniform Lifetime Table.
Uniform Lifetime Table
So what does this table mean?
Here's a short example of a 79 year old individual with $400,000 in IRA assets. To calculate the Required Minimum Distribution, just divide the prior year's ending IRA asset balance by the distribution period applicable to the individual's age.
IRA Balance / Distribution Period = Required Minimum Distribution
$400,000 / 19.5 = $20,513
Note that there are some exceptions. For example, if your spouse is the sole beneficiary of your IRA and he or she is more than 10 years younger than you are, you are subject to lower Required Minimum Distributions and need to use Table II
What Are My Specific RMDs?
We’ve made this simple calculator that shows your projected required minimum distribution in the future
Do I actually have to start taking my Required Minimum Distribution at age 70½? What happens if I don’t?
In general, Required Minimum Distributions must begin at 70½. You must take your first required minimum distribution for the year in which you turn age 70½. However, the first payment can be delayed until April 1 of the year following the year in which you turn 70½. If you choose to take advantage of this one-time later RMD deadline, keep in mind you'll have to take two Required Minimum Distributions during the same calendar year (since your next RMD will be due by December 31). This may put you in a higher tax bracket for that year, and increase the taxes you owe.
In very limited cases, individuals can receive exemptions. one exemption is if you are age 70 or older, are still working, and don’t own more than 5% of the company you’re working for. In that instance, you may be able to delay your RMD from a Qualified Retirement Plan/Keogh until you retire.
If you don’t take Required Minimum Distributions (or not a large enough amount) you’ll be subject to a 50% excise tax on the difference that you were supposed to pay and what you did pay.
How can I defer a portion of my Required Minimum Distribution and lower the amount I’m required to withdraw?
One of the only ways to defer your Required Minimum Distribution is by taking a portion of your IRA balance and purchasing a Qualified Longevity Annuity Contract or QLAC.
QLACs are a specific type of deferred income annuity that receives unique treatment in the tax code. The money used to purchase a QLAC is not subject to the Required Minimum Distribution, meaning that it could lower your RMD by as much as 25% from ages 70 to when the income from the QLAC starts (which can be as late as age 85).
How much would a Qualified Longevity Annuity Contract or QLAC lower my Required Minimum Distribution in my specific situation?
We built this tool to give you a sense of the total impact. The tax deferral is influenced by your tax bracket, when you purchase the product, and when you elect to have income on the product begin.
What are the key features of a Qualified Longevity Annuity Contract that I should know about?
In July 2014, the Treasury Department released rules that exempted one financial product from the RMD rules. The product, a Qualified Longevity Annuity Contract (QLAC), is a deferred income annuity that meets specific requirements. Since the rules announcement, about 10 insurers have received regulatory approval to sell QLACs.
A QLAC is best for those in at least average health and acts in much the same way as a pension or Social Security. You receive predetermined or inflation-adjusted payments from the insurance company on a regular basis that make it simpler to manage your retirement spending.
A QLAC does not have cash value, meaning that you should not use money from your assets to purchase a QLAC if you think you’d need to access it in the future. QLAC purchases are restricted to the lesser of 25% of your IRA assets or $125,000. To see quotes from carriers across the market, visit our quoting tool here or download our guide.
What are the Required Minimum Distributions for an Inherited IRA? What are the Required Minimum Distributions in instances where my spouse is at least ten years younger than I am?
In both those instances, the calculation of Required Minimum Distributions is different. We recommend consulting your financial advisor or following up with us via email, phone or chat.
What kinds of plans are subject to the RMD?
Most IRAs (including traditional and rollover IRAs) and all 401(k)s are subject to the RMD. Roth IRAs (unless inherited) are not subject to the RMD, but Roth 401(k)s are subject to the rules. Here’s a list of the accounts you must take an RMD from:
Individual Retirement Accounts (IRAs)
- Savings Incentive Match Plan for Employees (SIMPLE)
- Simplified Employee Pension (SEP)
Qualified Retirement Plans (QRPs)
- Individual 401(k)
What is the purpose of Required Minimum Distributions?
In short, the government wants to ensure that the tax-advantaged accounts intended for retirement spending aren’t used as estate planning tools for the wealthy.
If I have more than one account subject to the RMD, where do the withdrawals need to come from?
An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts.