Marcus Explains: What Are RMDs?

What we’ll cover:

• RMDs are the amount of money you have to withdraw from certain retirement accounts after a specific age
• RMD rules are set by the IRS, and failure to follow those rules could result in a penalty
• Given the complexity of the 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. RMDs are usually subject to income tax. And they are governed by a series of IRS rules. 

Who has to take RMDs?

If you have one of these types of retirement savings accounts and retirement plans, you’ll probably be required to take minimum distributions:

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

When do I need to take a RMD?

Due to a recent change in the law, the answer is a little less straightforward than before, so bear with us.

Before 2020, in most cases, you must start taking RMDs from your retirement accounts when you turn 70 ½.

Congress passed a law (the SECURE Act) in December 2019, raising the age at which you must start taking RMDs from 70 ½ to 72. This update went into effect on Jan 1, 2020. 

So keep in mind that if you turned 70 ½ in 2019, you are still subject to the old RMD age rule. Don’t worry, we’ll provide a basic example in the next section.

How do I take a RMD?

In addition to having rules about how old you need to be to start taking RMDs, the IRS also has rules (surprise, surprise) about when you have to take RMDs during a calendar year. As always, it’s easier to explain with an example. 

If you turned 70 ½ years old in 2019 and have a traditional IRA, here are the basic RMD rules:

• You have to take your first RMD by April 1 of the year after the year you turn 70 ½. This date is known as your “required beginning date.” Let’s say you turned 70 ½ on July 15, 2019. You have to take your first RMD by April 1, 2020. 
• After that first RMD, you must continue to take a RMD each year by December 31, starting in the calendar year of your required beginning date. So sticking with the example above, you must take your second RMD by December 31, 2020. Then, you would have to take another by December 31, 2021, December 31, 2022, etc. 

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 your original RMD amount! 

Required minimum distributions (RMDs) are waived for 2020 under the CARES Act

In response to the Coronavirus pandemic, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which contains several provisions affecting retirement accounts. 

Specifically, the law waives RMDs for those who are normally expected to take a distribution in 2020.

In other words, if your retirement plan is subject to RMDs – for example, a traditional IRA, 401(k) plan or other defined contribution plan – those distribution requirements are suspended for 2020, so you have the option to not take a RMD for that year. 

Consult with your financial or retirement advisor if you have any questions about how this waiver might affect you.

Where can I get more details?

RMD rules are complicated, and the IRS can provide more details on your options and obligations as well as how RMD amounts are calculated. But heads up: there will be a lot of reading.

This is why it’s a good idea to get some 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.