6 Important Retirement Plan RMD Rules

Not following them could result in a penalty

The Internal Revenue Service (IRS) requires required minimum distributions (RMDs) from retirement accounts. You must take RMDs as of April 1 if you turned 73 on or after Jan. 1, 2023, an increase from age 72, according to the SECURE Act 2.0. If you were 72 in 2022 or earlier, you continue taking RMDs as scheduled. Calculating these distributions can be tricky, so know the rules to avoid IRS penalties.

Key Takeaways

  • The first distribution from your retirement account in any year is part of your required minimum distribution.
  • If you have several IRAs, you can combine the RMD amounts for each into one sum from one account.
  • Account custodians tell you that an RMD is due, but they don't have to calculate the amount unless you ask.

1. RMDs: Not Rollover-Eligible

Required minimum distributions must not be rolled over to an individual retirement account (IRA) or another eligible retirement plan. Similarly, they cannot be converted to a Roth IRA. If you roll over or convert your RMD, it will be treated as an excess contribution that must be removed from the account by a certain time to avoid taxes and penalties.

Note that the limit on annual contributions to an IRA is $6,500 for 2023. There's also an allowed catch‑up contribution for individuals aged 50 and over of an additional $1,000.The first distribution from your IRA for any year when an RMD is due is considered part of your RMD for that period.

2. Combining RMDs Into One Account

If you participate in more than one qualified plan, such as a 401(k) and a 457(b), your RMD for each account must be determined separately. As such, each appropriate amount must be distributed from the respective type of plan. If you own multiple IRAs or multiple 403(b) accounts, then you may aggregate the RMD for all similar plans, traditional IRAs, or 403(b)s), and then take the amount from one account of each type of plan.

3. IRA Transfers in an RMD Year

You may transfer your entire IRA balance even if an RMD is due, provided you take the RMD from the receiving IRA by the applicable deadline. As the custodian of your new IRA may not know that the RMD associated with the old IRA is due, be sure that you remember that it is and take it by the deadline. If you forget, then you will face a 50% penalty.

4. Death, Divorce, and the RMD

If you were married as of January 1 of the year when the calculation is done, then you are treated as married for the entire year for RMD calculation purposes. This applies even if you divorce or your spouse dies later that year.If your spouse beneficiary is more than ten years younger than you are, then you may use Table II in Appendix B of IRS Publication 590-B, titled “Joint Life and Last Survivor Expectancy.”

“Upon divorce, RMDs and retirement assets, in general, can become very tricky and vary from state to state,” says Dan Stewart, CFA, president of Revere Asset Management Inc. in Dallas. “And community property states would have different rules than other states. So competent counsel is important, especially to avoid or minimize taxes.”

5. Family Attribution Rule

An individual who owns more than 5% of a business cannot delay beginning the RMD for a non-IRA retirement plan beyond April 1 of the year following the year when they reach the required age, even if they are still employed.

If you own more than 5% of a business and your spouse or children are employed by the same company, then your ownership may be attributed to them. This means they might be considered owners and could be subject to the same deadline as you.

6. IRA Custodian Reporting

Each year, the custodians/trustees of your traditional IRA, SEP IRA, or SIMPLE IRA must send you an RMD notification if they held that account on December 31 of the preceding year. This notification must be sent to you by January 31 of the year when the RMD applies.Some custodians will include a calculation of your RMD amount for the year, while others will inform you that an RMD is due and only offer to compute the amount upon your request.

What Is the Penalty for Missing an RMD?

You could face a penalty of 25% of the value of the withdrawal if you fail to take the RMD. This amount was reduced from the previous fine of 50% after the SECURE Act 2.0 was passed in December 2022. You can reduce the fee to 10% if you correct it by the date the penalty is imposed.

Can I Withdraw From My Retirement Account and Take an RMD in the Same Year?

According to the IRS rule, if an investor receives a regular distribution annually from an IRA, any amount distributed during a year when an RMD is due is considered part of the RMD until the RMD amount is distributed.

Can I Withdraw My Full RMD From One IRA if I Have More Than One?

An owner of 2 or more IRA accounts may take the individual RMD amount from each IRA account, total the amounts, and take the money from one IRA, or take any portion of the combined amount from each IRA plan as long as the total equals the RMD requirement.

The Bottom Line

The six rules discussed here serve as a general guide for all retirees. However, certain conditions may apply, given your circumstances and situation. If you have any questions about how to calculate or when to take your RMDs, consult a tax professional.

Correction—May 1, 2023: The article has been amended to clarify that the RMD age requirement was revised for individuals turning 73 on or after Jan. 1, 2023, but remains as 72 for those who began distributions in 2022 or earlier according to the SECURE Act 2.0.

Article Sources
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