Required Minimum Distributions: What Are They and How Do They Work?
by Mike Murkins CFP® Financial Planner |
August 23, 2023
In December 2022, the SECURE 2.0 Act was signed into law with the primary goal of making retirement savings more accessible for Americans. Some of the more significant changes that came from this legislation are the rules around the Required Beginning Date (RBD) for retirement account distributions. For individuals who are still uncertain about when and how much should be distributed from retirement accounts to avoid paying unnecessary penalties, this article will break down the pertinent rules as they relate to Individual Retirement Accounts (IRAs).
What is the Required Beginning Date (RBD)?
If you have an Individual Retirement Account (IRA), you are required to begin withdrawing money by a specific date. The date by which you must take your first required minimum distribution is considered the Required Beginning Date. The RBD is April 1 of the year following attainment of a specific age as outlined in the SECURE 2.0 Act.
At what age will I have to take my first Required Minimum Distribution (RMD)?
Through 2019, IRA distributions could be delayed until age 70½. This age was modified with the passing of the SECURE 1.0 Act. Beginning in 2020, individuals could delay RMDs until age 72.
Congress acted again in 2022 with the passage of the SECURE 2.0 Act. This legislation further delayed the age at which RMDs must begin. This is what the law currently states:
To summarize this in a more succinct way, for those turning 72 in 2023 you can now delay your first RMD to age 73.
Note: There seems to be a drafting error in the current law as outlined above. For those born in 1959, it currently stands that they would either take their
first RMD at age 74 or 75. We are hopeful that this error will be corrected long before this age group reaches RMD age.
By what date do I have to take my first and subsequent withdrawals?
Let’s break this question into two parts. Your first required minimum distribution from your IRA must be distributed by the required beginning date of April 1 following the year that you attain RMD age. For example, an individual turning 73 in 2024 is required to take their first RMD by April 1, 2025.
All subsequent required minimum distributions must be taken annually by December 31.
Should I delay my first RMD into the subsequent calendar year?
You may have just recognized that the RBD provides an opportunity for tax planning purposes. For some individuals, pushing your first RMD into the first quarter of the next calendar year can be very beneficial. For example, the state of Iowa changed tax law beginning in 2023 and IRA distributions are no longer taxable at the state level. If you were eligible to delay your first RMD into the first quarter of 2023 then you could have avoided paying the state tax on your first RMD. However, you should keep a close eye on your federal tax bracket and the impact this strategy may have on your Medicare premiums.
Note: Please keep in mind that if you choose to defer your first RMD into the first quarter of the following year, you will now need to take your first and second year RMDs all in one year.
What if I do not take the required amount from my IRA by the deadline?
Until 2023, the penalty on any missed Required Minimum Distribution was set at 50%. Under the SECURE 2.0 Act, the IRS now imposes a penalty of 25%. This is in addition to the ordinary income tax that will be paid on the distribution.
How do I calculate my Required Minimum Distribution (RMD)?
To calculate your RMD, you will need the following:
The value of your IRA on December 31 of the prior year.
Simply divide your prior year-end value by the factor given in the life expectancy table. You will want to use the factor based on the age you are turning in the current year.
For example, for a person turning 83 in 2023 with a prior year-end IRA value of $500,000, we would use a factor of 17.7. Dividing $500,000 by 17.7 equals $28,249. Therefore, this individual would be required to take at least $28,249 prior to the end of the 2023 calendar year.
I have several IRAs. Do I have to take an RMD from each of my IRAs?
If you own several IRAs, the good news is that you can take your entire RMD from just one IRA. However, you will have to calculate your total RMD for all IRAs to determine this figure. Please keep in mind that this does not consider RMDs for inherited accounts and employer-sponsored retirement plans.
Expanding on our last example, let’s assume that that this same 83-year-old has two IRAs. The first IRA has $100,000 and the second IRA has $400,000. $100,000 divided by 17.7 equals $5,650. While your $400,000 IRA would have an RMD of $22,599. You have the option to take the total amount of $28,249 from just one of your two IRAs. Or you could simply take the respective amount from each account to satisfy your RMD.
What is a Qualified Charitable Distribution (QCD)?
Qualified Charitable Distributions (QCDs) are withdrawals from an IRA that go directly to a qualified charity. Due to the nature of the distribution, it is not recognized as ordinary income and counts toward your Required Minimum Distribution for the year. This is an excellent way for individuals to give to charitable causes they feel strongly about while realizing a direct tax benefit.
As you are likely starting to suspect, RMD rules can get complicated very quickly, and frequent changes in legislation make it rather difficult to determine the optimal distribution strategy in retirement. Please visit with your financial planner to ensure that you are meeting the IRS requirements on retirement account distributions.