To Withdraw or Not to Withdraw: IRA & 401(k) Required Minimum Distribution (RMD) Rules & FAQs

New RMD rules require withdrawing funds from your IRA and 401(k) at 72. If you don’t take the required minimum distribution, you could face a tax penalty. woman shopping in a grocery store: Required minimum distributions (RMD)
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Key Takeaways

  • When you reach age 72, you may be required to take distributions from your IRAs and other retirement accounts

  • Withdrawal requirements will vary from person to person because they depend on several factors

  • Failure to take required minimum distributions may result in a stiff penalty

After decades of socking away money in retirement funds, baby boomers have started to hit the required minimum distribution (RMD) age threshold of 72. Once you reach this age, the government requires that you start drawing down the assets in certain types of retirement accounts via RMD, or else face a stiff penalty. Here are the things you should know about RMD rules.

Avoid These Common RMD Mistakes

Taking an RMD isn’t a complicated transaction, but there are details you’ll need to manage to avoid penalties.

If you don’t take the correct amount or don’t take RMDs at all, for instance, you could end up paying hefty tax penalties. Keep in mind that RMDs count as taxable income, which means you may owe a portion to Uncle Sam come tax time.

Also, make sure your retirement account beneficiary designations are up to date. Having outdated beneficiary designations, or not having any, means your assets may not be distributed according to your wishes.

Six Things You Need to Know About RMD Rules

  1. How much do I need to withdraw? RMDs will vary from person to person and account to account because they’re based on your age and the value of your account on December 31 of the previous year. It’s a good idea to be aware of the IRA and workplace retirement plan minimum distribution rules that apply to you. Worksheets and tables are available on the IRS website. Your RMDs should be calculated each year based on your account balance at the end of the previous year, your current age, and your life expectancy. It’s important to plan properly for these annual distributions if you want to avoid paying penalties and excess taxes.
  2. Are there exceptions? Of course. A Roth IRA has no RMDs during the owner’s lifetime. However, Roth IRAs are subject to RMDs after the owner dies, and the same 50% penalty will apply if the beneficiary of the Roth IRA does not take the RMDs.
  3. How will it affect my taxes? IRA RMDs usually count as ordinary income in the year you receive the distribution. The RMD will be added to all your other income for that year and will be taxed according to your tax bracket. If you made nondeductible IRA contributions or after-tax contributions to your company retirement plan, the amount of your contribution will not be taxable, but the earnings are. For your IRA, review your IRS Form 8606 to calculate how much of your RMD would be taxable. For your company retirement plan, contact your plan administrator to determine what amount is nontaxable.
  4. Will this impact my Social Security check? It definitely could. RMDs increase your taxable income, which may push you into a higher tax bracket. That can impact other retirement benefits like Social Security and Medicare.
  5. What is the deadline to take the RMD? Your first IRA required minimum distribution is due by April 1 the year after you turn 72. After that first year, the annual deadline is December 31. Consider taking your first distribution by December 31 the year you turn 72 if you want to avoid having two taxable distributions in the same year. Similar rules apply to taking RMDs from company retirement plans. The difference is you may need to withdraw your first RMD by April 1 of the year after you turn 72 or retire, if your employer’s plan allows it.
  6. What is the penalty? It’s a big one, which is why it’s important to make sure you adhere to the guidelines. If you don’t take your full RMD by the deadline, you may end up paying a 50% tax on the amount you failed to take, as well as any applicable income taxes on the entire amount of the distribution.

Consider a Roth Conversion

Unlike a traditional IRA, which is tax deferred until withdrawn, a Roth IRA is taxed up front but is tax free when you take it as a distribution. Again, with a Roth there is no RMD during the owner’s lifetime. However, Roth 401(k) plans have RMD rules and requirements. Contact your plan administrator on the company 401(k) plan to learn how it processes 401(k) RMDs. But a word of caution: If you’re taking an IRA RMD and considering converting your traditional IRA to a Roth IRA this year, you must first satisfy this year’s RMD. In other words, you’re not allowed to convert RMD money. 

If you have any questions about RMDs or Roth conversions, consult with your financial professional to make sure you understand all the withdrawal rules. 

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

Don’t Need Your RMD to Cover Current Expenses? Four Ideas:

  1. Reinvest into a taxable account. But remember: You’ll need to cover the tax bill and perhaps pay a transfer fee. 
  2. Help the grandkids cover education expenses. Grandparents can fund a 529 plan—up to $15,000 per year per child—without incurring federal gift taxes.*
  3. Increase your charitable giving. According to the IRS, if you’re older than 70 1/2, the IRA Charitable Rollover allows you to donate up to $100,000 to charitable organizations directly from your IRA without having it count as taxable income.
  4. Fund a Roth IRA. If you have other earned income, you could use it to fund the Roth, then use the RMD for living expenses.

*An investor should consider a 529 Plan’s investment objectives, risks, charges, and expenses before investing. A Program Disclosure Statement that contains this and more information should be read carefully before investing.

Investors should consider before investing whether their or their beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, or protection from creditors that are only available for investments in such state’s qualified tuition program, and should consult their tax advisor, attorney, and/or other advisor regarding their specific legal, investment, or tax situation. All investments involve risk including the loss of principal.


Key Takeaways

  • When you reach age 72, you may be required to take distributions from your IRAs and other retirement accounts

  • Withdrawal requirements will vary from person to person because they depend on several factors

  • Failure to take required minimum distributions may result in a stiff penalty

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