Required minimum distributions, often called RMDs, are IRS-mandated account withdrawals that the retirement account owner must take. These distributions must begin when the account owner reaches a certain age. Understanding RMD requirements for different account types is essential for managing retirement assets effectively and minimizing the unnecessary tax liabilities for failing to comply.
Traditional Individual Retirement Accounts (IRAs), Inherited IRAs, 401(k) plans, 403(b) plans and 457(b) plans are among the accounts subject to RMD rules. Here's what to know about each account type.
Traditional IRAs
For Traditional IRAs, the RMD rules apply once the account owner reaches their RMD age. The distribution amount is calculated based on the account balance at the end of the previous year and the account holder's life expectancy as per the IRS's Uniform Lifetime Table. The IRS Joint and Last Survivor Table applies if the account owner is married and their spouse is more than ten years younger.
Inherited IRAs
Inherited IRAs, or "beneficiary IRAs," have different RMD rules depending on the beneficiary's relationship to the original account owner. If the owner had not yet begun taking RMDs, the beneficiary could withdraw all the funds within five years or take RMDs based on their life expectancy.
However, the SECURE Act 2019 introduced a new rule that most non-spouse beneficiaries must drain their accounts within ten years.
401(k), 403(b), and 457(b) plans
Employer-sponsored retirement plans like 401(k), 403(b), and 457(b) plans follow similar rules as traditional IRAs. The RMDs must begin at the account owner's RMD age, and the distribution is calculated based on their life expectancy and account balance. If they are still working and own more than 5% of their business, they can delay RMDs for one more year.
Roth IRAs
Roth IRAs don't have RMD rules during the lifetime of the original account owner because the contributions to a Roth IRA are after-tax dollars. However, non-spouse beneficiaries of a Roth IRA are subject to the ten-year rule introduced by the SECURE Act.
Understanding RMD requirements for different account types is crucial when planning for retirement. The rules surrounding RMDs are complex and subject to change, as evidenced by the recent SECURE Act. Therefore, consulting with financial or tax professionals is advisable to strategize the most tax-efficient way to manage withdrawals.
Sources:
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs#
https://www.investopedia.com/terms/r/requiredminimumdistribution.asp
Important Disclosures
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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