Understanding Required Minimum Distributions (RMDs)
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Key Points
The designated beneficiary may be changed even after distributions to the owner have begun.
The beneficiary has no impact on the RMD for the owner unless the beneficiary is the spouse and is more than ten years younger than the owner
It is critical for anyone entering the distribution phase of retirement investing to have a good distribution strategy in place. When you reach the age of 73, you must begin withdrawing cash from conventional IRAs and eligible plans such as 401(k)s. Suppose you have other sources of income to supplement your retirement income. In that case, it may make sense to withdraw only the minimal amount needed from your IRAs, allowing more of your retirement funds to be invested tax-deferred on your behalf. Taking more than is required or necessary may result in the loss of a potential tax-deferral opportunity.
How do you calculate RMDs?
To determine your RMD for the current year, divide your prior year's year-end retirement account balance by the applicable factor from the IRS Uniform Lifetime Table (on the left). The Uniform Lifetime Table is based on the owner's age and a projected beneficiary who is ten years younger. If your spouse is your sole beneficiary and is more than ten years younger than you, the Joint Life and Last Survivor Expectancy tables are applied. The Joint Life Table may be found in IRS publication 590.
If you rolled money out of an IRA at the end of the year, check with your tax advisor to see if you need to include the amount rolled out in the IRA's year-end value.
Multiple IRAs
If you have more than one traditional IRA, you must calculate the required distribution for each IRA separately since different distribution factors may apply in some situations. You can, however, add these minimal amounts and deduct the total from any one or more of the IRAs.
Employer plans
The requirements for RMDs for employment plans differ from those for IRAs. One notable distinction is that you cannot combine RMDs from various employer plans. Your RMD from each project must be calculated and withdrawn individually. The second significant distinction is that you are only required to accept an RMD from your current employer's plan once you retire if you own 5% or more of the firm.
Additional RMD start date information
If you want to receive your first distribution on April 1 of the year following the year you reach 73*, you must take a second distribution by December 31 of the same year. Each year, all dividends must be taken by December 31.
Suppose an IRA owner dies after age 73 but before receiving the IRA owner's distribution for the year of death. In that case, the distribution must be made to the beneficiary in the year of death.
Beneficiary RMDs
Spouse beneficiaries can immediately roll the assets into their own IRA, move later, or leave them in a beneficiary IRA and take RMDs from the account as needed. Remember that an IRA rollover has advantages and drawbacks based on the investment alternatives, services, fees, withdrawal options, mandated minimum distributions, tax treatment, and your specific financial circumstances and retirement objectives. The decision may consider the beneficiary's age and need for access to support. Before making a choice, the recipient should speak with their investment and tax professionals.
Spouse beneficiaries under the age of 59 1/2 who require or desire access to IRA assets can avoid early distribution tax penalties by keeping the IRA as a beneficiary IRA, from which early withdrawals are not subject to penalty. Non-spouse beneficiaries may not roll inherited IRA assets into their own IRA but may roll them into an inherited IRA held in the decedent's name. Non-spouse beneficiaries who do not qualify for an exemption must drain the inherited IRA by the end of the tenth year following the IRA owner's death. Some beneficiaries will be forced to take a minimum distribution each year for the next ten years, while others will not. It would help to speak with your tax professional about your circumstances.
Eligible designated beneficiaries include disabled, chronically sick beneficiaries, persons no more than ten years younger than the decedent, and the IRA owner's minor children. Qualified designated beneficiaries can compute their yearly minimum payouts based on their single life expectancy.
When the minor offspring of IRA holders attain the age of majority, they will be subject to the ten-year rule.
The five-year rule typically applies if there is no specified beneficiary or if the beneficiary is a charity or estate (an entity with no life expectancy) and the owner dies before the required distribution date. Some trusts have named beneficiaries, while others do not.
Consolidating IRAs
Why combine your IRAs into one? Many retirees have assets spread across many accounts. Consolidating holdings into a single IRA may lower the likelihood of a computation mistake. In 2023, the penalty for not taking your total RMD will be 25% of the amount necessary but not taken. Also, consolidating into a single IRA may be advantageous.
■ Simplify asset allocation and rebalancing
■ Simplify tax reporting
■ Simplify beneficiary review and management
■ Reduce fees
RMD planning opportunities
RMDs can present planning opportunities for individuals who only need some of the assets. For example,
■ 529 savings plan accounts for younger family members
■ Charitable-giving options
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
Portions of this article were sourced from the work of MFS Heritage Planning. Neither MFS nor any of its subsidiaries are affiliated with Optima Capital Management.
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