What are Required Minimum Distributions?
Required minimum distributions are legally mandated withdrawals from a qualified retirement plan. The rules governing required minimum distributions dictate the minimum amount you must withdraw from your account each year starting at age 73, depending on your age as of January 1, 2023.
How is the Required Minimum Distribution calculated?
The amount you must withdraw is based on the value of your account at the beginning of the year in which you are required to take the distribution. This total is then divided by your life expectancy as determined by the IRS. One of three separate tables is used, depending on your situation:
- If your only beneficiary is your spouse and they are more than 10 years younger than you.
- If you have other beneficiaries besides your spouse, or your spouse is not more than 10 years younger than you.
- If you are the sole beneficiary of the account.
The worksheets available on the IRS website can help you calculate the required minimum distribution for the year. There are also online calculators that can perform the same function. Most retirement plan administrators or financial advisors can assist you in calculating your required minimum distributions, but remember that they are not obligated to do so.
Distribution rules after death
The rules change slightly if the account owner who is required to take required minimum distributions passes away. For plan holders who died before January 1, 2020, the entire account balance must be distributed to their beneficiary within five years or over their remaining life expectancy, starting from the year of the account owner’s death. For plan holders who die after December 31, 2019, the entire account balance must be distributed within 10 years. There are exceptions for some beneficiaries, including the surviving spouse, minor children, someone who is not more than 10 years younger than the plan holder, or someone who is disabled or has a chronic illness.
Spending Required Minimum Distributions
For fortunate retirees who have other sources of retirement income or may not spend the assets in their qualified retirement accounts, the requirements for required minimum distributions begin to create taxable income that they may not intend to have. Like any other income in retirement, you can allocate your required minimum distributions toward living expenses or a taxable investment account or a cash gift to charity. But the one thing you cannot do is reinvest the amount into another qualified retirement account.
Roth Accounts and Required Minimum Distributions
It is important to note that Roth accounts are not subject to required minimum distribution rules during the lifetime of the account owner unless inherited, in which case there are different distribution rules. However, Roth 401(k) accounts are still subject to required minimum distribution rules. You can avoid taking required minimum distributions from a Roth 401(k) by rolling the account over to a Roth IRA, but you will need to pay taxes on any employer contributions made pre-tax. You can learn more about all types of accounts subject to required minimum distribution rules and other information about required minimum distributions by visiting the IRS FAQ page on required minimum distributions.
Source: https://www.thebalancemoney.com/what-is-a-required-minimum-distribution-rmd-2894304
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