20 FAQs About RMDs

William H. Shawn

Co-Managing Partner, ShawnCoulson

After a one-year hiatus due to the COVID-19 pandemic, owners of qualified retirement plans and IRAs must adhere to the rules for required minimum distributions (RMDs). The RMD rules are tricky and could result in a substantial tax penalty if you’re not careful.

For starters, an RMD is the amount you must withdraw from a qualified retirement plan account or traditional IRA to avoid an expensive tax penalty after reaching the “magic” age. Here are the answers to 20 frequently asked questions (FAQs) about RMDs under current law.

1. What Was the One-Year Reprieve?

The CARES Act, which was enacted in March of 2020, suspended the RMD rules for the 2020 tax year. In fact, if you met certain timing requirements, you could “undo” RMDs taken earlier in the year. Now the standard rules are back in effect for the 2021 tax year and beyond.  

2. Which Plans Do the Rules Apply To?

The RMD rules apply to all employer-sponsored retirement plans, including:

  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Profit sharing plans, and
  • Other defined contribution plans.

Slightly different rules may apply to pre-1987 contributions to a 403(b) plan.

The rules also cover traditional IRAs and IRA-based plans, such as SEPs, SARSEPs and SIMPLE-IRAs. But there are exceptions in certain limited circumstances.

3. Do the Rules Apply to Roth Accounts?

The RMD rules also apply to Roth 401(k) accounts. However, they don’t apply to Roth IRAs while the original owner is alive. One way to avoid RMDs on your Roth 401(k) is to roll over the balance into your own Roth IRA.

After your death, however, beneficiaries of your Roth IRA must take RMDs under the same rules that apply to traditional IRAs. Because it’s a Roth IRA, the distributions will be tax-free, if the rules for qualified withdrawals are met.

4. When Must I Start Taking RMDs?

Previously, the required beginning date (RBD) was April 1 of the year after the year in which you turn 70½. However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act pushed back the RBD to 72 for individuals who reach 70½ after 2019.

For example, if you turned 70½ on January 1, 2021, you won’t be 72 until July 1, 2023. So you can delay your first RMD until April 1, 2024.

5. When Must I Take RMDs in Succeeding Years?

The deadline for taking subsequent RMDs is December 31 of the calendar year for which the RMD applies. Therefore, if you have to take your first RMD for the 2021 tax year by April 1, 2022, you must also take your RMD for the 2022 calendar year by December 31, 2022. To reduce overall tax liability, you might take the first RMD in 2021 instead of taking two RMDs in 2022.

6. How Do I Calculate the Annual RMD?

Generally, you just divide the balance in the plan or IRA on December 31 of the prior year by the appropriate life expectancy factor. However, your company plan or IRA trustee or custodian will usually calculate annual RMD amounts for you. The IRS provides the following life expectancy tables for taxpayers to use to calculate RMDs:

Joint life and last survivor expectancy table. This table applies if the sole beneficiary of the account is your spouse and he or she is more than 10 years younger than you.

Uniform lifetime table. This table applies if you’re unmarried, or if your spouse isn’t your sole beneficiary, or if your spouse isn’t more than 10 years younger than you.

Single life expectancy table. This table applies if you’re the beneficiary of an inherited account.

To illustrate, suppose a single 80-year-old with an account balance of $187,000 at the end of the previous year has designated a child as the sole beneficiary. Using the uniform lifetime table, the divisor for an unmarried 80-year-old account owner is 18.7. Thus, you would divide $187,000 by 18.7, resulting in an RMD of $10,000.

Important: The IRS has updated the life expectancy tables. The updated tables reflect longer life expectancies and will be used to calculate RMDs for 2022 and beyond.

7. Can I Withdraw More Than the Required Amount?

There’s no restriction against taking bigger-than-required distributions. You can take out as much as you want as long as you take at least the RMD amount for the calendar year.

8. Can I Get Credit in a Future Year for a Bigger-than-Required Distribution?

The RMD for each calendar year is calculated based on the account balance at the end of the prior year and the applicable life expectancy factor for that year. So, you can’t get a credit in a future year if you take a bigger-than-required distribution this year.

9. Must I Take RMDs From All Qualified Plans and IRAs?

You must calculate the RMD separately for each IRA you own. But you can withdraw the total amount from just one IRA or any combination of IRAs that you choose. The same rule applies to 403(b) plans. However, for all other qualified plans, the RMD must be taken separately from each plan account.

10. Will My Plan Administrator or IRA Trustee or Custodian Ensure that My RMD Is Made on Time?

A plan administrator or IRA trustee or custodian may provide the information for you to calculate RMDs or do the calculation for you. But it’s ultimately your responsibility to take the RMD for the applicable tax year. (See “Don’t Wait Until the Last Minute” at right.)

11. How Do I Estimate the Penalty?

Subtract any distributions that you took from the RMD amount that you should have taken. The RMD penalty equals 50% of that difference. For example, if you were required to withdraw $10,000 and took out only $2,500, the penalty is $3,750 (50% x $7,500). If you make this same mistake for several years, the penalties will continue piling up until you start taking the proper RMD amounts.  

The penalty is in addition to any other income tax that you owe for the year. Penalties are the responsibility of the account owner, not the retirement plan or IRA trustee or custodian.

12. How Do I Estimate the Income Tax on an RMD?

The taxable portion of any RMD is taxed at ordinary income rates. But any amount attributable to a return of basis in the account is tax free. As mentioned earlier, the RMD rules don’t apply to an original Roth IRA owner (the person for whom the account was originally set up).

13. Are There Any Exceptions to the RMD Penalty?

The penalty may be waived if you can show that the shortfall was due to reasonable error and you’re taking steps to remedy it. Your tax advisor can help draft a letter of explanation and file the appropriate tax form to demonstrate why your situation qualifies for an exception.

14. Are RMDs Subject to the NIIT?

Distributions from qualified retirement plans and IRAs aren’t included in net investment income for purposes of the 3.8% net investment income tax (NIIT). However, RMDs will drive up your modified adjusted gross income, which could trigger or increase NIIT liability on your net investment income.

15. If I Take RMDs, Can I Still Contribute to a Qualified Employer Plan or IRA?

RMDs don’t affect your eligibility for contributions to qualified retirement plans. So, if an 80-year-old employee still works and participates in a qualified employer plan, his or her employer must make contributions on the individual’s behalf and give the employee the option to continue making salary deferrals if the plan permits them. Otherwise, the employer’s plan could lose its qualified status.

Previously, you couldn’t contribute to a traditional IRA after you turned 70½. However, the SECURE Act removes this limitation. For 2020 and thereafter, there’s no age restriction. But you must have earned income that at least equals your contribution. There has never been any age restriction on Roth IRA contributions, but you must have earned income that at least equals your contribution.

16. Do I Have to Take RMDs If I’m Still Working?

Generally, you must take RMDs from all qualified plans and traditional IRAs. However, you don’t have to withdraw an RMD from your employer’s qualified plan if you still work full-time for the employer and you don’t own 5% or more of the company. There’s no similar exception for traditional IRAs.

In addition, you must still take RMDs from qualified plan accounts that you may still have at former employers. (That is, accounts that haven’t been rolled over to your current employer’s plan.)

17. Can I Roll Over an RMD to another IRA or Tax-Deferred Retirement Plan?

Rollovers are strictly prohibited. Allowing retirees to roll over RMDs to other retirement accounts would defeat the purpose of the mandatory distribution rules.

18. Can I Donate RMDs to Charities?

For IRAs, the answer is yes. The tax law allows you to annually transfer up to $100,000 directly from an IRA to an IRS-approved charity without paying tax on the distribution, and the distribution counts towards your RMD obligation for the year. However, you can’t deduct the charitable contribution. If your spouse has an IRA set up in his or her own name, your spouse is entitled to a separate $100,000 limit.   

19. What Happens If I Die Before RMDs Start?

If you die before the RBD, no RMD is required for the year of death. For subsequent years, beneficiaries must take RMDs from inherited accounts. Under the SECURE Act, the account usually must be emptied out within 10 years, subject to exceptions for so-called “eligible designated beneficiaries,” such as a beneficiary who is disabled or has not yet reached the legal age of majority. Also, the 10-year rule doesn’t apply to beneficiaries of account owners who died before 2020.

Important: For an inherited account,a spousal beneficiary has greater flexibility than a non-spousal beneficiary, including being able to treat the inherited account as the spouse’s own account.       

20. What Happens If I Die after RMDs Start?

If you die on or after the RBD, the beneficiary of the inherited account must take an RMD for the year that you passed away. The inherited account usually must be emptied out within ten years, subject to exceptions for spousal beneficiaries and eligible designated beneficiaries. Also, the 10-year rule doesn’t apply to beneficiaries of account owners who died before 2020.

Important: The beneficiary of an inherited retirement account is exposed to the 50% penalty on any RMD shortfalls. If the retirement account owner dies midyear, the beneficiary may be unaware that the owner has passed away before taking his or her full RMD amount for the year.

Other complex RMD rules may apply if there are multiple non-spousal beneficiaries or if a trust is the beneficiary of a retirement account. Contact your tax professional for guidance if you inherit an IRA or other tax-favored retirement account. It’s important to understand what you must do to avoid the punitive 50% penalty for failing to comply with the RMD rules.

Possible Changes in the Works

In recent months, some legislators have discussed the possibility of more tinkering with the RMD rules. For instance, one proposal would push back the RBD even further to the year after you turn 75. But no changes appear imminent as of this writing. Contact your tax advisor if you have questions about how the RMD rules impact your company qualified retirement plan account(s) and your IRA(s).

Don’t Wait Until the Last Minute

If you’re subject to the required minimum distribution (RMD) rules for 2021, you have until year end to figure out the amount. As long as you get the money by December 31, 2021, you’re in the clear for this year.

However, to minimize the possibility of error by missing the deadline, make sure to take your RMDs well in advance of December 31. This will give you plenty of time to make any necessary corrections before the time is up.