• James D. Lynch

What are Required Minimum Distributions?

If you have an IRA, 401(k), or other type of retirement account, you cannot keep retirement funds in your account indefinitely. You generally have to start taking withdrawals when you reach age 70½, even if you don’t need the money. Required Minimum Distributions (RMDs) are the minimum amounts that a retirement plan account owner must withdraw annually.

The purpose of the RMD rules is to ensure that people do not defer taxation indefinitely. Your withdrawals will be included in your taxable income, except portions that were taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).

The amount of the RMD for any year is the account balance as of the end of the preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner. You can withdraw more than the minimum required amount, but not less.

There are consequences for failure to take RMDs. If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.

IRS rules prohibit transferring your RMD into another tax-advantaged retirement account. But you can avoid further RMDs by converting the remaining portion of your retirement account to a Roth IRA.

Roth IRAs are not subject to RMDs (until after the death of the owner) because the contributions to the Roth IRA were already taxed. However, a Roth 401(k) account is subject to the same RMD requirements as a pre-tax 401(k), even though no taxes are due on the withdrawal. You can avoid RMDs by rolling your Roth 401(k) into a Roth IRA.