What Is an RMD? How Required Minimum Distributions Work

If you have a traditional IRA, SEP, or SIMPLE individual retirement account, you are required to start withdrawing a minimum amount each year from that fund when you reach a certain age. This mandatory, taxable withdrawal is called a required minimum distribution (RMD), and its purpose is to ensure that account holders actually use their retirement savings and don’t use their IRAs to accumulate interest and avoid tax payments indefinitely.

RMDs have gotten a lot of attention this year, as the Coronavirus Aid, Relief, and Economic Security (CARES) Act suspended required withdrawals from retirement accounts in 2020 to give those accounts more time to recover from post-COVID stock market downturns. However, next year, account holders who are 72 or older (or 70½, if you reached that age in 2019), must resume taking their annual RMDs.

Here’s a brief overview of RMDs and how they can impact your taxes.

How do RMDs work?

As mentioned above, an RMD refers to the minimum amount that’s required to be withdrawn from your retirement account each year. The Internal Revenue Service helps taxpayers calculate this amount using a set of worksheets to divide the account’s year-end fair market value by the account holder’s life expectancy. While you can withdraw more than the minimum required amount if you want or need to, you must pay income tax on the amount you withdraw. 

With the exception of account holders who turned 70 ½ in the year 2019, IRA owners must take their first RMD by or before April 1 following the year they turn 72, and continue to take subsequent withdrawals every year after that. Be sure to stay on top of your deadlines if you’re approaching or above this age. If you miss your withdrawal deadline, you can expect to pay the IRS a 50% penalty of the total amount of money they were supposed to withdraw. 

Keep in mind that Roth IRAs are not subject to RMDs, regardless of the account holder’s age, because taxes are already paid on the funds in these accounts. 

How to calculate your RMD

The IRS breaks down all the information you need to calculate your RMD in Publication 590-B. There are three different tables that the IRA offers for taxpayers, depending on their personal circumstances:

1. Joint and Last Survivor Table. This table is used if your spouse is the sole beneficiary of your IRA and/or if you are 10 years older than your spouse.
2. Uniform Lifetime Table. In order to use this table if you have more than one beneficiary and you are less than 10 years older than your spouse.
   
3. Single Life Expectancy Table. This table is used if you are a beneficiary of an account such as an inherited IRA.

If you have more than one qualifying individual retirement account, you will need to calculate each separately. While you may have similar balances in multiple accounts, your calculation can vary. Calculations factors in your age, account balance, and in some cases, your beneficiaries. 

Be sure to consult a financial professional after you go through the IRS worksheets to help you ensure your calculations are accurate. 

Get help from a trusted CPA.

Not sure how your RMD will impact your tax planning? The trusted team at Miller & Company can help you calculate your withdrawal amount and determine how to plan ahead for owed income taxes. Contact us to schedule your consultation.

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