Required Minimum Distribution: Who, What, When, and How Much?

by Michael on Feb 7, 2013

Photo of a Stack of Money

I recently learned that my parents nearly forgot to take the Required Minimum Distribution (RMD) from my dad’s IRA last year.

Fortunately, they remembered at the last minute and avoided any penalties, but it was a close call — too close for comfort.

Going forward, I’ll be helping them out with this (and a few other financial tasks) to make sure nothing slips through the cracks.

In the mean time, I thought it would be worth putting together a brief summary of exactly what the RMD is for those that aren’t familiar with the details.

What is a Required Minimum Distribution?

Your RMD is an amount that you have have to withdraw each year from your retirement accounts once you reach the age of 70-½. Affected account include those in profit-sharing plans, 401(k) plans, 403(b) plans, 457(b) plans, traditional IRAs, SEP-IRAs, SARSEPs, and SIMPLE IRAs.

In other words, pretty much everything other than a Roth IRA (while the owner is still alive). Note that if you have a Roth version of one of the above accounts — e.g., a Roth 401(k) — it’s still affected by the RMD rules.

Calculating your RMD

Your RMD is based on the balance of any affected accounts as of December 31st of the preceding year. Full details can be found in IRS Publication 590, but the short version is that the size of your RMD is based on your life expectancy.

In general terms, the older you get, the larger the required distribution (for a given account balance). The goal here is to make you draw down your account balances over time instead of letting you keep the money stashed away forevermore.

A couple of notes:

  1. If you have multiple IRAs you calculate the RMD separately for each but can take the (total) distribution from just one. Same deal if you have multiple 403(b) accounts. But for 401(k) and 457(b) plans, you have to take your RMD separately for each account.
  2. While you are welcome to withdraw more than the RMD in any given year, such excess withdrawals cannot be credited toward your RMD in future years — though they do reduce the balance on which future RMDs will be calculated.

When should you take your RMD?

You have to take your first RMD during the year in which you turn 70-½, though that first payment can be delayed until April 1st of the following the year. From that point forward, you have to take your RMD for a given year no later than December 31st of that year — though you can take it much earlier if you wish.

Note that, for employer-related accounts, if you continue working past 70-½ you can delay your RMD until retirement. To be clear, this exception doesn’t apply to regular IRAs or if you’re a 5% owner of the business sponsoring the plan.

Also note that there are some possible differences for 403(b) contributions pre-dating 1987, but that’s such a specific case so I won’t delve into it any further.

What if you don’t take your RMD?

This is what had my parents freaked out… What would happen if they hadn’t taken their RMD by December 31st? As it turns out, the penalties are fairly draconian.

If you fail to take your RMD, or you don’t take enough, the amount withdrawn is taxed at a whopping 50%. This gets reported on IRS Form 5329 for the year in which you failed to take the RMD.

The good news is that it’s possible to get this penalty waived. To do this, you need to establish that the shortfall was due to “reasonable error” and that “reasonable steps” are being taken to remedy the shortfall.

To qualify for this relief, you need to include a letter of explanation along with Form 5329 (be sure to read the instructions). Note that the waiver isn’t automatic, so do yourself a favor and take your RMD.

As for my parents’ situation… My hope is that I’ll be able to set things up so that their RMD happens automatically. That way we won’t have to worry about manually requesting it (and possibly forgetting) each year.

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