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Retirement Planning > Spending in Retirement > Required Minimum Distributions

Investors' Top 10 RMD Questions, Answered

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Included in all the recent tweaks to the tax code from the Secure Act, the CARES Act and new Biden administration initiatives, there have been several changes to the required minimum distributions retirees must take from their IRAs and other retirement plans. Add them together, and they could have a significant impact on the way clients handle their finances in retirement. Use this guide to help your clients better understand RMDs.

1. What types of retirement plans require RMDs?

The RMD rules apply to all employer-sponsored retirement plans, including 401(k)s, 403(b)s, 457(b)s, and profit-sharing plans, as well as traditional IRAs plus IRA-based plans such as SEPs, SARSEPs and SIMPLE IRAs. The RMD rules also apply to Roth 401(k) accounts, but only after the owner has died.

2. When do clients have to start taking RMDs?

Due to changes made by the Secure Act, which passed in 2019, if a client’s 70th birthday is July 1, 2019, or later, you they not have to take withdrawals until they reach age 72. This is up from the previous deadline of age 70½. This seemingly small change could have a big impact on retirement accounts: You get an additional 18 months in which, rather than beginning to deplete your savings, you have the opportunity to let them grow further.

3. How do I calculate an RMD?

The IRS calculates RMDs by taking the sum total of all your tax-deferred retirement accounts at the end of each year and dividing it by a number based on your life expectancy and a few other factors. As your age increases, the required distributions get larger. The IRS worksheet for calculating RMDs can be found here.

4. Are RMDs still waived this year, like they were in 2020?

Last year, the CARES Act allowed everyone to waive their RMDs in response to the COVID-19 crisis, but there is no RMD waiver for 2021. As a result, clients turning 72 or older as of December 31, 2021, must take an RMD by year end. 

5. When is the annual RMD deadline?

For most people, the annual deadline for taking an RMD is Dec. 31. But if it’s your first RMD, you can wait until April 1 of the next year. So if this is your first year to take an RMD, you don’t have to take it until April 1, 2022. If you wait that long, though, remember that you’d have to take two RMDs in that calendar year — the first by April 1 and the second by December 31.

6. What happens if I don’t take my RMD before the deadline?

For those who don’t withdraw the full RMD amount before the deadline, the amount they should have withdrawn but didn’t will be taxed at 50%. Clients who find themselves in this position need to file IRS Form 5329 with their federal tax return.

7. How are RMDs taxed?

For the most part, RMDs are treated as ordinary income and the client will owe federal income tax on the proceeds. This includes any IRA contributions that were tax-deductible at the time they were made. But if the client also made nondeductible contributions to an IRA, not all of the RMD will be subject to income taxes. 

8. Does it ever make sense to start taking RMDs early?

For some people with excessively large retirement accounts, it can make sense to start taking distributions from tax-deferred accounts at age 59½, which is usually when you can start doing so without incurring a 10% penalty. This reduces the size of the tax-deferred accounts, which means it also reduces RMDs, allowing you to potentially slip into a lower tax bracket in retirement. You might also try to figure out if taking your RMDs a little earlier will allow you to wait to take Social Security, since that benefit increases for every year it’s delayed up to the age 70.

9. How can my clients avoid paying taxes on RMDs?

If you expect your tax rate to increase in the future, you could consider converting a regular IRA into a Roth IRA. There are no RMDs required from a Roth during the course of your lifetime, and distributions from Roth IRAs are always tax-free. You’ll have to pay income taxes on some of the assets in the IRA when you convert it to a Roth, but you don’t have to convert all of the assets in a regular IRA, so you’ll have some flexibility with this strategy. 

10. Can I use RMDs for charitable contributions? 

If you transfer funds directly from your IRA to a qualified charity, your distributions will not be taxable. These qualified charitable distributions (or QCDs) count as RMDs and can run as high as $100,000 a year.