Feb 23, 2021

A Basic Guide to Required Minimum Distributions (RMDs)

The beauty of your Individual Retirement Account or qualified employer-sponsored retirement plan is that the money grows tax-deferred until you begin making withdrawals.  Once you reach the age of 72, the Internal Revenue Service requires you to begin taking these withdrawals, called Required Minimum Distributions (RMD). Here’s how to know what you’ll have to take:

How to calculate RMDs

Your RMD is calculated by dividing the prior year's December 31 account balance by your life expectancy factor. There are three IRS life expectancy tables you can use to find your own life expectancy, depending on your situation.

          1. UNIFORM LIFETIME TABLE–The Uniform Lifetime table provides the joint life expectancy factor of you and a beneficiary who is exactly ten years younger than you. Use this table unless your spouse is your sole beneficiary and is at least ten years younger than you, in which case you use the Joint Life and Last Survivor table instead. This gives you a lower RMD, which will allow more of your retirement assets to remain in the IRA growing tax-deferred.
          1. JOINT AND LAST SURVIVOR TABLE – Use this table if your beneficiary is a spouse who is more than ten years younger than you.
          2. SINGLE LIFE EXPECTANCY TABLEThis table is used by designated beneficiaries based on their age in the year after the IRA owner's death. That factor is then reduced by one for each succeeding distribution year. Spousal beneficiaries who do not roll the IRA over or treat it as their own should also use this table, although they will need to recalculate their life expectancy each year.

 

Special Rules:

If you have several different Traditional IRAs, you are required to calculate the RMD amount separately for each IRA, but you may aggregate those amounts together and take the total RMD from one or more of your accounts. For qualified retirement plans, such as a 401(k), profit sharing, pension or 403(b), the RMD amount must be calculated separately for each account, and the RMD must be withdrawn from the respective retirement accounts.

If you’re over age 72, still employed and participating in your employer-sponsored plan, you generally have until the later of April 1 of the year following the year you turn age 72, or the date in which you retire from the employer who maintains the plan, to begin taking your RMD.  This is referred to as the still-working RMD exception rule.

A Qualified Charitable Distribution, or QCD, is a distribution made directly by the trustee of your Traditional or Rollover IRA to an organization eligible to receive tax-deductible contributions. To be eligible to make a QCD, you must be at least age 70½ (not 72, like with RMDs) and the QCD cannot exceed $100,000 in a given calendar year. If all or part of your RMD is given to a qualified charity, this rule allows you to satisfy some or all of your RMD for the year without being taxed on the distribution.

 

Inheriting an IRA

When an IRA owner dies, his or her designated beneficiary is entitled to the remaining balance in the IRA. The distribution options for the beneficiary will depend upon whether the IRA owner dies before, on or after the required beginning date as well as the relationship of the beneficiary to the IRA owner. This chart shows you the various beneficiary distribution options:

          This is just a basic guide, but there are many factors that can affect your RMD planning. It is important to consider everything with the guidance of a retirement planner who is knowledgeable and up to date on the current tax code.  While Baird Retirement Management does not offer tax or legal advice, our Financial Advisors regularly work with clients' attorneys and tax professionals and can help ensure that all phases of your wealth management are being addressed.

  IF2021-0203

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