RMD Precautions And Options

A reminder about mandatory withdrawals from IRAs & other retirement plans.

RMD Precautions & Options Just what is an RMD? Before 2020, the IRS required you to withdraw a specified amount of money in most retirement savings accounts each year after you turned 70½. These withdrawals are officially called Required Minimum Distributions (RMDs).1,3

The 2019 SECURE Act changed the Required Minimum Distribution Age from 70 ½ to 72. This applies to those who turn 70 ½ in 2020 or later. You must now take an RMD from a Traditional IRA after you turn 72, even if you’re still working. If you don’t, a severe financial penalty awaits - you may have to pay a 50% excise tax on the leftover amount of the distribution that you failed to withdraw. The exact RMD amount varies from year-to-year. You are not required to take RMDs from a Roth IRA during your lifetime.2,3

You must also begin taking annual RMDs from SEP and SIMPLE IRAs, pension and profit-sharing plans and 401(k), 403(b) and 457 retirement plans annually past age 72. If you are still employed, you may be able to delay taking RMDs from a profit-sharing plan, a pension plan, or a 401(k), 403(b) or 457 plan until you retire. The exception: you must take RMDs from these types of accounts after you turn 72 if you own 5% or more of a business sponsoring such a retirement plan. 1,4,5,6

The annual RMD deadline is December 31, right? Yes, with one notable exception. The IRS gives you 15 months instead of 12 to take your first RMD. Your first one must be taken in the calendar year after you turn 72. So if you turned 72 in 2020, you can take your initial RMD any time before April 1, 2021. However, if you put off your first RMD until the next year you will still need to take your second RMD by December 31, 2021. 2,6,7

Calculating RMDs can be complicated. You probably have more than one retirement savings account. You may have several. It may be wise to talk with a financial advisor to get the calculations right and avoid IRS penalties.

Multiple IRAs. Should you own more than one Traditional IRA, SEP IRA, or SIMPLE IRA, annual RMDs for these accounts must be calculated separately. The IRS does give you some leeway about how to withdraw the money. You can withdraw 100% of your total yearly RMD amounts from just one IRA, or you can withdraw equal or unequal portions from each of the IRAs you own. 1,4,5

401(k)s & other qualified retirement plans. A separate RMD must be calculated for each qualified retirement plan to which you have contributed. An exception: if you have multiple 403(b) TSAs (Tax Sheltered Annuities), you can optionally withdraw the sum of all of the RMDs for them from one 403(b) TSA. RMDs for qualified retirement plans must be paid out separately from the RMDs for your IRAs. 1,4,5

It is really important to have your advisor review all of your retirement accounts to make sure you fulfill your RMD obligation. If you skip an RMD or withdraw less than what you should have, the IRS will find out and hit you with a stiff penalty - you will have to pay 50% of the amount not withdrawn.

Are RMDs taxable? Yes, the withdrawn amounts are characterized as taxable income under the Internal Revenue Code. Should you be wondering, excess RMD amounts can’t be forwarded to apply toward next year’s RMDs. Using the IRS tables to calculate RMDs it’s easy to see that each year, the RMD percentages increase which can push retirees into a higher tax bracket. Further, RMDs can trigger other tax issues related to having a higher Adjusted Gross Income (AGI). 1

Many retirees don’t realize how RMDs will affect their taxes until they reach their late 70s, but luckily, there are strategies that can reduce or eliminate RMDs.

What if you don’t need the money? If you are wealthy, you may view RMDs as an annual financial nuisance - but the withdrawal amounts may be redirected toward opportunities. While putting the money into a savings account or a CD is the usual route, there are other options with potentially better yields or objectives. That RMD amount could be used to:

  • • Make a charitable gift. (With enough lead time, a charitable IRA rollover may be arranged; the IRA distribution meets the RMD requirement and isn’t counted as taxable income).
  • • Start a grandchild’s education fund.
  • • Fund a long term care insurance policy.
  • • Leverage your estate using life insurance.
  • • Diversify your portfolio through investment into stock market alternatives.

There are all kinds of things you could do with the money. The withdrawn funds could be linked to a new purpose.

So to recap, be vigilant and timely when it comes to calculating and making your RMDs. Have a tax or financial professional help you, and have a conversation about the destiny of that money.


1 - irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions

2 - bankrate.com/finance/money-guides/ira-minimum-distributions-table.aspx

3 - investopedia.com/terms/r/requiredminimumdistribution.asp

4 - irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

5 - irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans

6 - waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf

7 - thebalance.com/required-minimum-distributions-2388780