How RMDs Work in Real LifeSubmitted by Mission Financial Planning on July 19th, 2016
Updated for the new SECURE Act: For any individual born after June 30, 1949, the required beginning date for Required Minimum Distributions (RMDs) is April 1 of the year after the year in which such individual reaches age 72 (or, in the case of certain plans, if he or she is still working, after the year in which he or she retires if later). Previously, the trigger age was 70½.
COVID-19 UPDATE: As of 3/28/2020, RMDs can be suspended for 2020 for those who prefer to leave that money invested.
In another post in this series we discussed how to calculate your Required Minimum Distribution (RMD). Once you know how much the RMD is for each of your accounts, you need to plan the distributions. We see some clients take their distributions as an annual lump sum, others divide the amount by 12 and set up monthly distributions.
When you know the total amount of all RMDs, you can take that whole amount from one account if you wish (aggregate your RMDs), or divide it between accounts. Let’s say you have five IRAs, each has an RMD due of $10,000. You can make a withdrawal from each account for its RMD, or you could add up the total amount of RMDs due and take the total of all RMDs from one IRA (a distribution of $50,000) and leave the others alone. You can divide up the $50,000 in any way that benefits your investment strategy or simplifies your life, just as long as you get the distribution made (discussion of consequences are covered in another post about RMD Pitfalls). Some investment custodians have a default process for distributing RMDs, be sure to communicate with the provider to get the money your way.
A few very important caveats:
- RMDs from Employer (401(k), 403(b) and 457(b) and other pension) accounts cannot be satisfied through an IRA (More about that in RMDs for Business Owners and Employees); they will need to be calculated separately. Pension RMDs must come from the respective pension account.
- Roth IRAs are not subject to RMDs; don’t include them in your total.
- Inherited IRAs have to satisfy their own RMD
- Pre-1987 403(b) accounts may have different RMD rules; check with your employer, plan administrator, or provider if you own an older 403(b) account
If you are making distributions from a traditional IRA that has both pre-tax contributions and non-deductible (after-tax) contributions, the money that has already been taxed is tracked on IRS form 8606 to avoid double taxation.
Other posts in the RMD series include:
- RMD Basics
- Thinking About RMDs Before You Turn 70
- Special Situations – exceptions to the rules
- Making Charitable Donations with your RMD
- Roth IRAs and RMDs
- Pitfalls of RMDs – some things to be extra careful of when you’re RMD aged.
- RMD Strategies
- What Happens When You Forget an RMD
- RMDs for Business Owners and Employees