How to Determine and Take Your RMD

Take Your Required Minimum Distribution Correctly or Face Penalties

You Must Withdraw the Correct RMD Each Year or Face Stiff Penalties

After you reach age 72 (70½ if you were born before July 1, 1949), the IRS requires you to withdraw a minimum amount of money from your retirement accounts. The IRS refers to this mandatory withdrawal as a required minimum distribution or RMD.

Penalties for Failing to Meet RMD Threshold

If you do not make the required minimum withdrawal, the penalties are very severe—50% of the amount not taken on time. You read that correct, 50%. If your RMD is $20,000 and you only make a $10,000 withdrawal, the IRS will fine you $5,000 (50% of the $10,000 RMD you did not take.)

To avoid this onerous penalty, you must calculate your RMD carefully. There is a form to request abatement from these penalties and the IRS has been very forgiving in the past if you corrected the error as soon as it was discovered.

RMD Requirements Suspended for This Year

Due to the pandemic, the IRS has suspended the requirement for 2020. This suspension helps seniors avoid locking in the pandemic-related losses in the stock market.

You may also repay payments already taken as long as it is done within 60 days of the payment, so timing is critical if you want to take this route. This is treated as a rollover, so you cannot have done a rollover in the past year, nor can you do another one for one year.

How to Calculate Your RMD

First, determine the accounts covered by your RMD. These accounts will include the following tax-deferred retirement accounts:

  • Traditional IRAs
  • Rollover IRAs
  • SEP IRAs
  • Most 401(k) and 403(b) plans
  • Profit-sharing plans
  • Other defined contribution plans

You can exclude Roth IRAs, non-qualified plans and defined benefit plans.

Second, total the balance or fair market value (FMV) of your tax-deferred accounts as of December 31 (for the year before the tax year in question). In filing your taxes for the tax year 2021, you will total the amounts as of December 31, 2020.

The custodians for your tax-deferred accounts should provide you with your prior year’s FMV totals by January 31 each year however this may be at a later date.

Third, determine your life expectancy factor (LEF).

The IRS provides a table for calculating this at the following link.

For your convenience, we summarize the tables below.

Finally, divide the totals in your accounts by your LEF

To calculate your RMD, you divide the total FMV of all your tax-deferred accounts by your LEF. If your accounts total $220,000 on December 31, 2020 and your LEF is 22, you must withdrawal at least $10,000 ($220,000/22) by December 31, 2021.

You must calculate your RMD for each IRA separately, but the IRS gives you the flexibility of taking your total RMD from a single IRA or multiple IRAs. However, you must calculate RMDs separately for Qualified Retirement plans or inherited IRAs and take the relevant RMDs from those respective accounts.

If you want to double-check your calculation, Kiplinger provides on online RMD calculator.

RMDs and Roth IRAs

Because you contribute to a Roth IRA with after-tax money, you do not need to take an RMD from your Roth accounts. Keep in mind that withdrawals from your Roth IRAs will not meet your RMD. If you inherited a Roth IRA, you will need to take an RMD in that situation.

Deadline for Taking RMD

You must take your RMD by December 31 each year after you reach the relevant age. To ease into the program, you can delay taking your first RMD (and only the first), until April 1 of the year in which you reach age 72, which will be the next year.

If you do choose to delay, you must then take your first and second RMD in the same year (one by April 1 and the second by December 31.) Make sure you consult with your financial advisor or accountant before you delay your first RMD.

How the IRS Taxes Your RMD

The IRS will tax the money you withdrawal from a deferred-tax account as ordinary income in the tax year you take the RMD. You can reduce the amount of the tax by making a qualified charity distribution (QCD) from your retirement accounts. The agency allows you to count a QCD toward your RMD.

Consult your tax advisor to see if a QCD is appropriate for you.

This is a complicated tax situation. If you need help calculating your RMD, please contact us.

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