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Required Minimum Distribution (RMD) Rules: Breaking it Down

Required Minimum Distribution (RMD) Rules: Breaking it Down

April 10, 2024

Required Minimum Distribution (RMD) Rules: Breaking it Down

Note: This blog post is intended to provide a simplified explanation of the Required Minimum Distribution (RMD) rules. It is important to consult with a financial advisor or tax professional for personalized advice.

We get questions on Required Minimum Distributions (RMDs) often and how they work. If you have a 401(k) or an Individual Retirement Account (IRA), it's essential to understand the rules regarding Required Minimum Distributions (RMDs). RMDs are the minimum amount of money you must withdraw from these retirement accounts each year once you reach a certain age, as per IRS rules. In this blog post, we'll explain the RMD rules and some tips. We'll also discuss when you can aggregate 401(k) and IRA distributions and what you can do with your RMDs if you don't need the money.

What are Required Minimum Distributions (RMDs)?

Required Minimum Distributions (RMDs) are the minimum amount of money that the IRS requires you to withdraw from your retirement accounts each year. The purpose of RMDs is to ensure that individuals do not indefinitely defer paying taxes on their retirement savings.

When Do RMDs Apply?

RMDs generally apply to retirement accounts such as Traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k) plans. However, Roth IRAs are exempt from RMD rules during the account owner's lifetime.

Age for Initiating RMDs

The age at which you must start taking RMDs depends on the type of retirement account you have and what year you were born.  For most retirement accounts, including Traditional IRAs and 401(k) plans, you must start taking RMDs by April 1st of the year following the year you turn 73 (updated via SECURE Act 2.0). However, your RMD age may be 70½ or 72, if your birthyear was prior to the updated rules of SECURE 2.0.

Aggregating 401(k) and IRA Distributions

When it comes to aggregating 401(k) and IRA distributions, the rules can be a bit complex. In general, if you have multiple 401ks or 403bs, you must calculate the RMD for each account separately. However, you can aggregate the RMD amounts for multiple IRA accounts and withdraw the total from just one of them. This rule does not apply to 401k and 403b type accounts.

For example, if you have three IRA accounts, you can calculate the total RMD amount for all three accounts and withdraw the entire sum from just one of the accounts. This flexibility can make it easier to manage your RMDs if you have multiple IRAs, and this gives you the opportunity to analyze each IRA and decide which one(s) to withdraw from.

What Can You Do with RMDs If You Don't Need the Money?

If you don't need the money from your RMDs at this time, there are still some options available to you:

  1. Reinvest in a taxable account (after paying the taxes): You can reinvest the RMD amount in a taxable brokerage account. This allows your money to continue growing, potentially providing additional income or leaving a larger inheritance for your loved ones.
  2. Donate to charity: If you're charitably inclined, you can donate your RMDs directly to a qualified charity. This strategy, known as a Qualified Charitable Distribution (QCD), can have tax advantages, such as reducing your taxable income.
  3. Gift to family members (after paying the taxes): Since this is money you are forced to take anyway, family members may benefit from a gift from you for part or all of these funds.  However, it's important to consider the potential gift tax implications and consult with a tax professional.

Conclusion

Understanding the Required Minimum Distribution (RMD) rules is crucial for anyone with retirement accounts. By knowing when RMDs apply, how to calculate them, and what options you have if you don't need the money, you can make informed decisions about managing your retirement savings. Remember, it's always a good idea to consult with a financial advisor and tax professional to ensure you comply with the rules and make the most of your retirement funds.

 

PPG-6533103.1 (4/24) (Exp. 4/26)