A Required Minimum Distribution (RMD) is a minimum withdrawal that a person with a retirement account must take when they reach 70 and 1/2 years of age. Think of it simply as a minimum amount you would have to withdraw from your retirement fund each year when you reach the retirement age. There are however, some rules you should be aware of.
RMD Rules & Calculating Required Minimum Distributions
Here are some quick facts you should know about required minimum distributions:
- You must withdraw from your IRA or 401(k) when you reach 70 and 1/2 years of age, or later if you officially retire after that age (you must check with your employer to see if you’re eligible for this deferment).
- If your retirement plan is an IRA or you own 5 percent of a company that is providing the retirement plan, you must take distributions at age 70 and 1/2 with no exceptions.
- You are responsible for taking the appropriate minimum distributions or you will face heavy fines.
- RMD rules apply to all company-sponsored retirement plans, including profit-sharing plans, 401(k), 403(b), 457(b) and various IRA plans including SEPs, SARSEPs and SIMPLE IRAs.
- The deadline for the first RMD withdrawal is within the year the retirement plan participant turns 70 and 1/2, but can be delayed until April 1st of the following year (you must make withdrawals by December 31st in subsequent years).
- Calculating required minimum distributions involves dividing the value of the retirement account during the year prior by the participant’s life expectancy (also known as the applicable distribution period).
IRA/401(k) Beneficiary Required Minimum Distributions
In the unfortunate situation that a person dies before they are required to take an RMD, there are also some rules you should be aware of if you are the beneficiary. There are only 2 ways for you to receive the distributions:
- The entire retirement plan amount must be distributed to the beneficiary within 5 years.
- The entire retirement plan amount must be distributed to the beneficiary over the course of their life beginning no later than 1 year after the death of the original plan owner.
Distributions for Multiple Retirement Plans
If you have a few scattered IRA or 401(k) plans, here are some guidelines to help you better understand the RMD process:
- If you have multiple IRA accounts, you can add up the value of all your plans and take the required distribution amount from any one of the accounts.
- You can also take a small amount from each IRA account adding up to the total minimum distribution requirement if you own multiple accounts.
- If you own multiple 401(k) or 401(b) accounts, you must take the required distribution from each of your respective accounts when retired (it is advisable in this case to roll over multiple 401(k) accounts into a single IRA account).
- Remember that if you retire after age 70 and 1/2 and have a 401(k) plan, you do not have to take an RMD if your employer allows deferrals.
RMD Suspensions are Over
Congress passed a law that temporarily suspended required minimum distributions be taken for 2009 when markets performed so poorly in 2008. Many portfolios were at their lowest values, causing the government to issue the delay. RMDs are back in effect, however, so be aware if you have not taken your required distributions for the year.