What Are RMDs?

What we’ll cover:

• RMD is the amount of money you have to withdraw from certain retirement accounts after a specific age
  
• RMD rules are outlined by the IRS, and failure to follow those rules could result in a penalty
• Given the complexity of RMD rules, consider consulting a tax professional to confirm your RMD obligations

RMD stands for required minimum distribution. It’s the minimum amount of money you have to withdraw (or “distribute” in IRS speak) from certain types of retirement savings accounts each year after a specific age. RMD rules are outlined by the IRS, and distributions are usually subject to income tax. 

Who has to take RMDs?

You’ll have to pay attention to RMD rules if you have any one of these retirement savings accounts or retirement plans:

• Traditional IRA
• SEP IRA
• SIMPLE IRA
• 401(k), 403(b) and 457(b) plan
• Profit-sharing plan
• Other defined contribution plan

You may have noticed that Roth IRAs are not on the list. That’s because you don’t have to take RMDs from your Roth IRA while you’re alive. But the person who inherits your account – your beneficiary – may have to take RMDs after your passing (see IRS Topic: “Required Minimum Distributions for IRA Beneficiaries”).   

When do you need to take RMDs? 

If you’re required to take RMDs, in many cases, you have to start withdrawing from your retirement account or plan when you’re 72 years old (or 70 ½ if you turned 70 ½ before January 1, 2020). 

You may be wondering why there are two different ages for starting RMDs. Is the RMD age 72 or 70 ½? 

Here’s what you need to know: Before 2020, the RMD age was 70 ½ years old. But in December 2019, the SECURE Act was signed into law, raising the RMD age from 70 ½ to 72. This update went into effect on January 1, 2020. That means if you turned 70 ½ before January 1, 2020, you’re still subject to the old RMD rule, where you must start taking RMDs when you reach age 70 ½. But if you reach 70 ½ after the law went into effect (in 2020 or later), you don’t have to start taking RMDs until age 72.  

If you didn’t quite get all of that, don’t worry – we’ll look at a couple of examples from the IRS.

Let’s say you turned 70 ½ on July 15, 2019 – before the SECURE Act went into effect. This means you have to follow the old RMD rules: 

• You have to take your first RMD by April 1 of the year following the year in which you turn 70 ½. So, if you turned 70 ½ on July 15, 2019, you must take your first RMD by April 1, 2020. (This date is known as your “required beginning date”).  
• After the first RMD, you must take your next RMD by December 31 of each year beginning with the calendar year containing your required beginning date. So, sticking with our example above: After you take your first RMD by April 1, 2020, you must take your second RMD by December 31, 2020. Then, you must take your third RMD by December, 31, 2021. You’d repeat this each year for your subsequent RMDs. 

Now, let’s change things up a little. What if your 70th birthday was July 1, 2019? That means you turned 70 ½ on January 1, 2020 – when the SECURE Act came into effect. This means you’re not required to take a RMD until you reach 72. Here’s how it would work: 

• You must take your first RMD by April 1, 2022 (this is April 1 of the year after you reach 72).
• After that first RMD, you must take your second RMD by December 31, 2022. From there on, you must withdraw your RMDs each year by December 31. 

Why does any of this matter? 

The IRS isn’t known to have a sense of humor. If you don’t take RMDs on time or in the correct amounts you could end up paying costly penalties. How expensive are we talking? As much as 50% of the RMD amount that was not distributed! 

Parting thoughts 

RMD rules are complicated, and the IRS can provide more details on your options and obligations, as well as how RMD amounts are calculated (see: “Required Minimum Distributions”). But heads up: There will be a lot of reading. This is why it’s a good idea to get help from a financial advisor or tax professional who can sift through the dense reading materials and lay out the details that are applicable to you.