Why Are There Required Minimum Distribution Rules?
The required minimum distribution rules are intended to ensure that taxes are paid on profits retained in retirement accounts. Account holders must withdraw a minimum amount from their retirement funds and pay taxes on that amount annually once they reach a certain age. You must do this by April 1 of the year following the year you turn 72. After your first required minimum, you must continue to withdraw the required minimum annually by December 1.
When Should I Start Withdrawing the Required Minimum?
Many taxpayers might not have to take their first required minimum until April 1 of the year following their 72nd birthday, but the rule has not always been this generous. The cutoff age was 70.5 before the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019. Anyone subject to the old rules (born before July 1, 1949) has already started taking required minimum withdrawals and must continue to do so. Everyone else can wait until April 1 of the year following their 72nd birthday.
How Much Should I Withdraw?
The amount of the required minimum distribution is based on two factors: your account balance from the previous year on December 31, and a table published by the IRS that calculates the required minimum based on your age. You must use your age on your birthday in the year you are distributing. The IRS provides this standardized age table on its website to determine the required minimum amount based on your age. Additional tables are provided if you hold a joint account or are the last surviving account holder, or if you are single.
How Can I Calculate the Required Minimum Distribution?
Take your IRA account balance as of December 31 of the previous year, find your age in the appropriate table, and divide your account balance by the remaining distribution period based on your age. Let’s assume Bob has $100,000 in his IRA account as of December 31 of the previous year. Bob decides to take his first distribution in the year he turns 72. His remaining distribution period is 25.6.
$100,000 / 25.6 = $3,906.25
The amount Bob must withdraw for the tax year in which he turns 72 is $3,906.25.
The situation will look as follows over the first 20 years, from age 70 to age 90:
First Year Required Minimum Distribution Table (Uniform Age)
Age Distribution Period
70 27.4
71 26.5
72 25.6
73 24.7
74 23.8
75 22.9
76 22.0
77 21.2
78 20.3
79 19.5
80 18.7
81 17.9
82 17.1
83 16.3
84 15.5
85 14.8
86 14.1
87 13.4
88 12.7
89 12.0
90 11.4
How Does the Required Minimum Impact Roth Accounts?
You are not required to take the required minimum from a Roth IRA account because you paid taxes on your contributions at the time you made them. Roth IRA contributions are made with “after-tax” dollars. However, you must take the required minimum from other types of Roth accounts due to the tax benefit you received from those contributions. IRS rules require that you take the required minimum from Roth 401(k) accounts at retirement, rather than from Roth IRA accounts, but you can roll your Roth 401(k) into your Roth IRA to avoid this requirement.
Beneficiaries must take the required minimum from inherited Roth IRA accounts. They cannot allow the funds to grow tax-free indefinitely. They must begin to withdraw a specific amount each year.
On
Although you cannot convert the required minimum distribution to a Roth IRA, you can “in-kind” distribute funds from an IRA account. This means you distribute investment shares instead of cash. Those funds remain invested in a brokerage account.
Are there penalties for not withdrawing the required minimum?
The penalty for not withdrawing the required minimum is a 50% tax on any amounts not withdrawn timely. However, the penalty can be waived if you can show that you did not take the required minimum due to a reasonable error and you took steps to rectify the situation. You can submit Form 5329 to the IRS to request a penalty waiver, along with a letter explaining what happened.
Frequently Asked Questions (FAQs)
How much tax should I withhold from IRA distributions?
IRA distributions are subject to your income tax rate unless they are from a Roth IRA, in which case qualified distributions are tax-free.
What is a qualified distribution from a Roth IRA?
A qualified distribution from a Roth IRA is a tax-free withdrawal that meets all the requirements for tax-free withdrawals. For example, a withdrawal from a Roth IRA after reaching age 59.5 is considered qualified. Qualified distributions also include withdrawals at any age used to purchase, build, or renovate your first home.
How do I report IRA distributions on my tax returns?
IRA distributions are reported on Form 1040.
Was this page helpful?
Thank you for your feedback! Please let us know why.
Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
Source: https://www.thebalancemoney.com/required-minimum-distributions-2388780
Leave a Reply