Required minimum distributions
Know when the IRS will collect on your deferred tax dollars
Many retirement accounts, like traditional IRAs and employer-sponsored 401(k) plans allow you to postpone paying taxes on pre-tax contributions you made to the account, plus earnings, until you start taking distributions. That’s why they’re called tax-deferred retirement accounts, and they’re a great way to help you save for retirement. But the IRS will eventually get those deferred tax dollars from you — thanks to a rule called Required Minimum Distributions, or “RMDs.”
Be ready when your RMDs kick in
The whole point of tax-deferred retirement accounts is to accumulate more money for retirement by not paying current taxes on contributions you make to the account, plus earnings. But when you take money out of these accounts, the amount you receive will be subject to federal income tax. Tax laws require you to begin taking minimum, annual withdrawals from your tax-deferred retirement accounts. If you turned 70½ in 2019 or earlier and still have a balance in the plan, you are required to take a Required Minimum Distribution (RMD) by April 1 of the calendar year following the calendar year in which you reach 70½. Beginning in 2020 or later, if you have a balance in the plan, you are required to take a Required Minimum Distribution (RMD) by April 1 of the calendar year following the calendar year in which you reach 72. You can withdraw as much as you want, but you must withdraw a required minimum amount, whether you need the money or not — hence “Required Minimum Distributions.”
You can start taking withdrawals earlier too, but if you take a withdrawal prior to turning 59½ a 10% premature distribution penalty tax may apply. If you don’t need to take withdrawals, you can leave your money in the accounts for continued growth potential.
Do the math
If you are a participant in a 401(k) plan, you will need to calculate your RMD using your account balance as of Dec. 31 of the prior year and required to take a minimum distribution (RMD) by April 1 of the calendar year following the calendar year in which you reach age 70½ if you turned 70½ in 2019 or earlier. Beginning in 2020 or later, you are required to take the RMD by April 1 of the calendar year following the calendar year in which you reach age 72. Say for example:
- You have $373,000 in your 401(k) on Dec. 31, 2020, and you turn 73 in 2021.
- Based on the Uniform Lifetime Table, IRS Publication 590, your life expectancy factor would be 24.7.
- $373,000 ÷ 24.7 = $15,101.
- The 2021 RMD for your 401(k) account would be $15,102.
After the first RMD distribution year, you will need to take an RMD by Dec. 31 of each year. If you have more than one defined contribution plan, you may need to calculate and satisfy your RMDs separately for each plan and withdraw that amount from that plan. If you have more than one 403(b) tax-sheltered annuity account from the same sponsor, you may choose to total the RMDs and then take them from any one (or more) of the tax-sheltered annuities.
Similarly, each year take your Dec. 31 balance in your IRA account and divide by a life expectancy factor based on your age, according to the Uniform Lifetime Table. The result is your RMD in dollars. You’ll need to take this RMD amount out by Dec. 31 of each year. If a participant turned age 70½ in 2019 or earlier, the new RMD changes do not apply to them. Even if this is their first RMD and they chose to defer their distributions to April 1, 2020, they will still be required to satisfy their original RMD for 2019 and all future years thereafter. However, you may aggregate your RMD amounts for all of your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA.
If you own an IRA and also participate in an employer-sponsored plan like a 401(k) plan, you will need to perform two separate calculations and take out the RMD from each account on an annual basis.
Tips for RMD planning:
- Make a plan – Your RMD is the minimum you must take out. Create a withdrawal strategy to make sure you are taking out enough to meet your needs, but not so much that you’ll deplete your accounts too soon. Some retirement accounts offer distribution options that satisfy the RMD rules so that you don’t have to do the math. If you don’t take the RMD by the deadline, you may be subject to a 50% excise tax on the amount that should have been withdrawn.
- Consolidate multiple accounts – Since you need to calculate your RMD every year, consider consolidating your retirement accounts to simplify the process.
- If you are still working at age 72 – your plan may permit rolling over your IRA accounts to the employer plan where you are actively working prior to age 721. Then you will not need to take your RMD until you separate from service.
- Reinvest unneeded RMDs – If you don’t need the income to help cover your retirement expenses from your RMD, you could reinvest the distribution in one of your taxable accounts to cover future unanticipated expenses (medical) or invest it for your grandkids future education.
- If you don’t want to deal with RMDs – Roth IRAs do not have RMD requirements for the original owner or your spouse. However, RMDs will apply after the owner’s death for beneficiaries who are not your spouse. Please also note that there may be tax consequences associated with the conversion of an IRA to a Roth IRA.
Work with a pro
With the over 200 pages of rules written in the Department of Treasury specifically for RMDs, the nuances can be easily tricky. If you fail to take one or miscalculate and take too little, you’ll owe a penalty of 50% on top of the federal income taxes you will pay on the withdrawal. The rules for beneficiaries are even more complex. It is recommended that you speak with your own legal counsel to understand the federal income tax consequences based upon your individual facts and circumstances. Voya cannot provide you with legal and/or tax advice.
Carefully consider the provisions of your current retirement plan and the new product for differences in cost, benefits, surrender charges or other important features before transferring assets. A Voya Financial Advisors financial professional** can help you review and compare all your options to help you determine what makes the most sense for you.
This material is provided by Voya for general and educational purposes only; it is not intended to provide legal, tax, or investment advice. All investments are subject to risk. Please consult an independent tax, legal, or financial professional for specific advice about your individual situation.
1The change in the RMD age requirement from 70½ to 72 only applies to individuals who turn 70½ on or after Jan. 1, 2020.
**Investment adviser representative and registered representative of, and securities and investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC).