Because of the favorable tax treatment retirement plans and Individual Retirement Accounts (IRAs) offer, such as providing the ability for you to contribute dollars pre-tax, the government requires that you begin taking distributions at a certain age or at retirement. These distributions are referred to as required minimum distributions (RMDs).
When must RMDs begin?
Unless you are still employed, RMDs generally begin by April 1, of the year following the year in which you turn 73, and then by Dec. 31, of each year thereafter. Note that the required beginning date is earlier if you were born before 1951.
If you are still employed, your first RMD must be taken by April 1, following the year you retire. If you are more than a 5% owner of a sponsoring employer, you must begin taking distributions once you turn 73 (or earlier if born before 1951).
Failure to withdraw your RMD on time, or failing to take the full RMD amount, can result in a government-imposed penalty of 25% (10% in certain cases) of the amount of the RMD.
How is the amount of my RMD calculated?
Generally, the amount is calculated for each account by dividing the balance as of Dec. 31, of the previous year by a life expectancy factor.
If you are over 73 years old (or will be turning 73 in the next year), determine your RMD amount for the current year using FINRA’s Required Minimum Distribution Calculator.
How are RMDs taxed?
The RMD is taxed based on your individual tax rate at the time you take the distribution. However, a qualified distribution from a designated Roth account is completely tax-free.
Additional considerations regarding RMDs
As you think about your distribution strategy, here are a few additional items to consider:
- If you don’t need the RMD to meet your current financial needs, you can always reinvest the money in a taxable account for use in the future and to potentially generate additional earnings.
- While RMDs must be calculated for each applicable account, 403(b) contract holders can take the total RMD from one or more of the 403(b) contracts. RMDs from other types of accounts (401(k)s, 457(b)s, IRAs) must be taken separately from each account.
- If you inherited an account and if the original owner died on or after Jan. 1, 2020, (or on or after Jan. 1, 2022, for a plan sponsored by a governmental entity), in most cases, the inherited account must be fully paid out within 10 years after the date of death of the original owner. Eligible designated beneficiaries (EDBs) are exempt from this 10-year rule. Accounts inherited by an EDB must generally be fully paid out within five years of the death of the original owner or have a minimum amount distributed each year beginning in the year following the death of the original owner.
You are an EDB if you are:
- The spouse of the original account owner
- A minor child (not grandchild) of the original account owner. If this is the only reason the beneficiary is exempt, the 10-year rule begins the year the minor child attains age 21
- Less than 10 years younger than the original account owner
- Disabled/chronically ill (as defined under the applicable sections of the Internal Revenue Code)
Traditional (non-Roth) IRAs and RMD rules
If you have a traditional (non-Roth) IRA, you must take your first RMD by the April 1, of the year following the year in which you turn 73 (or earlier if you were born before 1951) and by Dec. 31, each year thereafter.
While you must calculate the RMD separately for each IRA that you own, you may withdraw the total RMD amount from one or more of your IRAs.
See the Internal Revenue Service’s Retirement Plans FAQs regarding Required Minimum Distributions for additional information.
OneAmerica Financial is the marketing name for the companies of OneAmerica Financial. • Required minimum distributions (RMDs) are minimum amounts that U.S. tax law requires to be withdrawn annually from traditional IRAs and employer-sponsored retirement plans. Based on the Secure 2.0 Act of 2022, RMD distributions vary based on the individual's date of birth, falling somewhere between age 70 1/2 and 75. For answers to specific questions, please consult a qualified attorney, tax advisor, or financial professional. • Provided content is for overview and informational purposes only and is not intended as tax, legal, fiduciary, or investment advice.