Required Minimum Distribution (RMD) Rules

LAST REVIEWED Jun 11 2020 8 MIN READ

By The Human Interest Team

President Donald J. Trump signed the Setting Every Community Up For Retirements Enhancement (SECURE) Act into law on December 20, 2019, as part of the broader Further Consolidated Appropriations Act of 2020. Many agree the SECURE Act will have one of the most significant impacts on retirement savings accounts since the Pension Protection Act was passed in 2006. One of the most notable changes includes the age when the required minimum distributions must begin. 

Required Minimum Distributions: Overview

Required Minimum Distributions (RMDs) are minimum amounts of money that retirement plan account owners need to withdraw beginning the year they turn 72 unless they turned 70 1/2 before January 1, 2020. In this case, they would have to begin RMDs at 70 1/2. If they are still working past the age of 72 they will start RMDs the year they retire. 

If the account owner has 5% ownership in the business sponsoring the plan or if the retirement account is an IRA, the RMDs must start when the account owner is 72, or 70 1/2 if they reached this age before January 1, 2020, regardless of whether they are retired or not.   

RMD rules apply to tax-deferred retirement plans, including rollover IRAs, traditional IRAs, SEP IRAs, and SIMPLE IRAs along with most 403(b)s, 401(k)s, and small-business accounts. They also apply to Roth IRAs; however, they don't apply when the account owner is still living.  

Lifetime Required Minimum Distributions (RMDs) To Start At Age 72 Under SECURE Act

The age at which participants in employer-sponsored IRA retirement plans or Roth IRA owners need to start taking RMDs increased from the year they turn 70 1/2 to the year they turn 72 with the passage of SECURE Act section 114. 

Individuals participating in 403(b)s, 401(k)s, and other non-IRA-based retirement plans sponsored by employers can still delay RMDs to when they are older as long as they're still working and meet IRC Section 401(a)(9)(c)(ii)(l) requirements. 

Also, the Required Beginning Date for IRA plan owners and many plan participants has changed from April 1 the year after they turn 70 1/2 to April 1 the year after they turn 72. 

How to Calculate RMDs

You can calculate an RMD for each account by dividing the previous December 31 balance of the account by a life expectancy factor published by the IRS in Tables in Publication 590-B, Distributions from IRAs. This can be done in three easy steps: 

  1. Write down the balance.

    This is the account balance as of December 31 from the previous year. 

  2. Locate the distribution factor.

    You will find this from the calculation table that correlates to the age you will be on your birthday of the current year. For many, this factor ranges from 27.4 to 1.9 since as an individual gets older, the factor number decreases. 

  3. Divide.

    Divide the balance of your account by your distribution factor. 

There are three life expectancy tables to choose from depending on your situation. 

  1. Joint and Last Survivor Table.

    Individuals should use this table if the sole beneficiary of your retirement account is a spouse who is more than ten years younger than you.

  2. Single Life Expectancy Table.

    Individuals should use this table if they are a beneficiary of an account like an inherited IRA. 

  3. Uniform Lifetime Table.

    Individuals should use this table if their spouse isn't the sole beneficiary of their account or if their spouse isn't more than 10 years younger than them. 

IRS Uniform Lifetime Table

According to the Uniform Lifetime Table, if you just turned 82 and your IRA balance with $225,000, your RMD for the year would be $2,743.90 ($225,000/82).

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Information courtesy of irs.gov via Forbes

RMD Deadlines and Exceptions

While individuals don't have a choice on taking their RMD, they don't need to make it in one lump sum. They can spread the withdraws out throughout the calendar year, as long as they meet the required RMD for that year by the stated deadline. If an individual doesn't take an RMD by the required deadline, the IRS will tax them 50% of the difference between the amount they were supposed to take out that year and the amount they withdrew. 

RMD Rules When a Spouse Inherits a Traditional IRA

If an individual inherits a traditional or Roth IRA from their deceased partner, they can rollover the assets into their own IRA. They can also choose to roll over the assets into what's called an inherited IRA the same way other beneficiaries can. When individuals roll over assets into their own IRA, they can use the Uniform Life Expectancy Table to determine RMDs after they turn 72. Also, they get another benefit. If they're older than 59 1/2, they can start withdrawing funds from their IRA without being hit with the 10% early-withdrawal penalty from the IRS. 

RMD Rules For A Non-Spouse Inheriting a Traditional IRA

With the passage of the SECURE Act in 2019, the RMD age increased from 70 1/2 to 72. It also basically removed the "Stretch IRA" choice for non-spouse individuals inheriting traditional and Roth IRAs. The law now states non-spouse beneficiaries have to take full payouts within 10 years of the initial account owner's death. However, there are no other distribution requirements they will need to make during that time frame. 

These new regulations also don't apply to minors until they reach the age of maturity. At that time, they'll have 10 years to complete a full payout from the IRA account. Individuals who are chronically ill or disabled per government guidelines also aren't affected by these new rules. Finally, beneficiaries who aren't more than 10 years younger than the originating IRA account owner at the time of their death are also not affected.

If you would like to learn more about the SECURE Act or about setting up IRA or 401(k) plans, reach out to Human Interest. We're happy to help with any of your retirement questions.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

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