The Required Minimum Distribution, or RMD, is the minimum required monetary amount that a retirement account holder must withdraw starting in the year that he or she reaches 70.5 years of age or, if later, in the year that he or she retires. Alternately, the account holder can wait until April 1st of the year following the year in which he or she turned 70.5 years of age. In addition, if the retirement account is an IRA, or if the account holder also owns at least 5% of the business sponsoring the retirement plan, the RMD must commence at 70.5 years of age, regardless of whether or not the account holder is retired.
Retirement accounts that have an RMD include all employer-sponsored retirement plans, including 401(k), 403(b), 457(b), and profit-sharing plans. Traditional IRA and IRA-like plans are also included, including the SEP, SAREP, and SIMPLE IRA plans. While the RMD rule does apply to a Roth 401(k) account, it does not apply to a Roth IRA while its owner is alive.
Should a retirement account owner die before his or her RMDs have started, the beneficiary of that account will be required to receive those RMDs. While the rules differ based on the age of the beneficiary, in most cases, he or she will start receiving RMDs either within five years of the original account owner’s death, or within one year of the account owner’s death and throughout the remainder of his or her lifetime. Publication 590, titled Individual Retirement Arrangements (IRAs), is offered by the IRS and provides more detail on when retirement account beneficiaries should start receiving their RMDs.
One’s RMD can be calculated by dividing the retirement account’s prior December 31st balance by a life expectancy factor that is published by the IRS in three Publication 590 tables. These tables are the following: the Joint and Last Survivor Table, which is used by an account holder whose sole beneficiary is a spouse who is more than 10 years younger than the account holder, the Uniform Lifetime Table, which is used by unmarried account holders, account holders whose spouse is not the sole beneficiary, or account holders whose spouse is not more than 10 years younger than the account holder, and the Single Life Expectancy Table, which is used only by the beneficiaries of a retirement account.
Although the retirement account administrator can calculate an RMD, it is ultimately the responsibility of the retirement account holder to accurately calculate his or her RMD. Stiff fines are placed on account holders who either fail to withdraw the full RMD, or who do not take their RMD by the stated deadline. In essence, any money not withdrawn from the retirement account is subject to taxation at 50%. The penalty can be waived, however, if the account owner takes steps to show that reasonable error resulted in the distribution shortfall. The account owner must also file Form 5329 with the IRS and attach a letter explaining the cause of the shortfall.