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Required Minimum Distribution Rules (RMDs) and Penalties

Mark Steber Chief Tax Information Officer Published On June 15, 2020

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Normally, taxpayers are required to withdraw an annual minimum distribution amount from their IRAs or certain pension plans once they reach age 72 (after December 31, 2019).

The amount of distribution can vary year to year and is based on:

  • The value of all the taxpayer’s traditional IRAs or the value of the pension needing distribution
  • The age of the taxpayer
  • If there is a beneficiary, the age of the beneficiary

Taxpayers who don’t make the RMD, must pay a 50% excise tax with their tax return for each year the payment isn’t made.

For tax year 2020, there is no RMD for either IRAs or pensions.

What are Required Minimum Distributions?

So, you have a retirement plan and are about to turn 72 years old. That’s when the annual IRS Required Minimum Distribution (RMD) rules kick in for most retirement plans, like traditional IRAs, and you need to understand what that means for you each year. The rules require money to be withdrawn from your total combined traditional IRA balances or from a pension plan each year and not following the rules can lead to penalties that are collected on a tax return. An RMD is the smallest amount of money you have to withdraw from a tax-deferred retirement account each year after you turn 72 years of age. You will need to also pay ordinary income tax on this money annually. The requirements can change based on the amount of money in your account and your age. The IRS outlines those on their site.

When do I have to start taking RMDs?

According to the IRS, for IRAs, including SEP and Simple IRAs, “if you reach age 72 in 2020 or later you must take your first RMD by April 1 of the year after you reach 72.”

  • IRAs (including SEP IRAs and SIMPLE IRAs)

    • April 1 of the year following the calendar year in which you reach age 70½, if you were born before July 1, 1949.

    • April 1 of the year following the calendar year in which you reach age 72, if you were born  after June 30, 1949.

  • 401(k), profit-sharing, 403(b), or other defined contribution plan

    Generally, April 1 following the later of the calendar year in which you:

    • reach age 72 (age 70½ if born before July 1, 1949), or

    • retire (if your plan allows this).

Every single year after your required beginning date, your RMD must be paid by December 31.

What if I’m still working at age 72?

Some people continue working after the age of 72 and there is a “still working” exception for RMDs associated with 401(k), profit-sharing, 403(b) or other company defined contribution plans. In that case, as long as you are still working on December 31st of any year, you can push the RMD for those plans off until you retire or leave the company.

If you have traditional IRAs, it doesn’t matter if you are still working you must start taking your RMDs. 

Do all retirement plans require minimum distributions?

As we mentioned, most retirement plans require RMDs. There is one notable exception: the Roth IRA. While the RMD rules do apply to Roth 401(k) plans, they do NOT apply to Roth IRAs, meaning that you don't need to take RMDs while you are alive, but if you leave the Roth IRA to a family member or friend, that beneficiary must take RMDs. That means you can leave your Roth IRA alone and not take any distributions during your lifetime so you can will it to your heirs without paying any taxes on the fund. However, your beneficiaries of the Roth IRA will be required to follow the standard RMD rules once they inherit the Roth IRA.

How much are the required minimum distributions?

RMDs are different for every person depending on your age and the amount of money you have in your traditional IRAs or your tax-deferred retirement account on December 31st of the year you are required to start withdrawing RMDs from your account.

How do I calculate my RMD? 

To calculate how much your RMD will be, you will need to add the total balance of all your traditional IRAs together. If have more than one retirement account, each account RMD is determined separately and generally a retirement account plan administrator will determine your RMD for you. Next, divide your account(s) balance on December 31st by your life expectancy factor. You can use the following life expectancy table from the IRS to determine your life expectancy factor based on your age if you are the retirement account owner AND unmarried, married and your spouse is no more than 10 years younger than you, or married and your spouse is not the sole beneficiary of your retirement account. 

IRS Uniform Lifetime Table

Age

Life Expectancy

70

27.4

71

26.5

72

25.6

73

24.7

74

23.8

75

22.9

76

22

77

21.2

78

20.3

79

19.5

80

18.7

81

17.9

82

17.1

83

16.3

84

15.5

85

14.8

86

14.1

87

13.4

88

12.7

89

12

90

11.4

91

10.8

92

10.2

93

9.6

94

9.1

95

8.6

96

8.1

97

7.6

98

7.1

99

6.7

100

6.3

101

5.9

102

5.5

103

5.2

104

4.9

105

4.5

106

4.2

107

3.9

108

3.7

109

3.4

110

3.1

111

2.9

112

2.6

113

2.4

114

2.1

115 and over

1.9

The IRS provides a worksheet you can use to calculate your Required Minimum Distribution unless your spouse is the sole beneficiary of your IRA and he or she is more than 10 years younger than you.

If your spouse is the sole beneficiary of your IRA and he or she is more than 10 years younger than you, you can use this IRS worksheet to calculate the Required Minimum Distribution for this calendar year.

Also, the AARP website has a great calculator you can use here

Are RMDs taxed?

Yes, RMDs are taxed as ordinary income in the year you take them if your contributions to the accounts were tax deductible. If you also made nondeductible contributions to your retirement accounts, meaning that you paid taxes on those contributions when you made them, some of the amount won't be subject to income taxes. You can learn more about how to calculate and report by visiting the IRS About Form 8606, Nondeductible IRAs page

What is the deadline for RMD withdrawals?

The Required Minimum Distributions deadline is December 31 each year. However, if it is your first year taking an RMD withdrawal, it is April 1st the year AFTER you turn 72.

What is the penalty for not taking a required minimum distribution?

NOTE: For 2020, due to COVID-19 and the subsequent stimulus enacted by Congress, Required Minimum Distributions and the associated penalties have been suspended.

What happens if I miss the RMD deadline?

NOTE: For 2020, due to COVID-19 and the subsequent stimulus enacted by Congress, Required Minimum Distributions and the associated penalties have been suspended. 

If you miss the RMD deadline of December 31st or April 1st for first timers the year after they turn 72, you will be required to pay an excise tax of 50% of the amount not taken. There is no grace period. You are required to withdraw the RMD by the deadline or you face penalties. You must immediately fill out Form 5329 and pay the associated excise tax amount. To streamline, on the check you send to the IRS, you should include your social security number, the current tax year, and Form 5329 in the memo section of the check.

If you realize you missed your RMD when you file taxes, you can include the Form 5329 with your tax return and the taxes will be included on the Form 1040.

However, if you believe that you missed the deadline for the RMDs due to a reasonable cause, you can request that the IRS waive the 50% excise tax. You will need to fill out Form 5329, provide your 1040 (taxes from the year), and a written explanation as to why you missed the RMD deadline.

About the Author

Mark Steber is Chief Tax Information Officer, responsible for key initiatives that support overall tax service delivery and quality assurance. Mark also serves as a Jackson Hewitt liaison with the Internal Revenue Service, states, and other government authorities. With over 30 years of tax experience and deep knowledge of the federal and state tax codes, Mark is widely referenced as an expert on consumer income tax issues, especially electronic-tax and data-protection issues.

View Mark's LinkedIn Profile Jackson Hewitt Editorial Policy

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