Article By: Jeff Skolnick, CPA

Required minimum distributions (RMDs) are the amount of money required to be withdrawn from your retirement account once you reach a certain age.

The beauty of most retirement plans is that they allow you to put aside for your retirement and not be taxed on this money when contributed. The money is considered tax deferred. In other words, you will eventually pay tax on that money but not until you pull the money out of your retirement account years down the road.  This typically will create a deduction on your individual return if you are using a vehicle such as a traditional IRA. In 2019, individuals may place up to $6,000 ($7,000 if age 50 or older) in an IRA account. Assuming the individual meets the tests in order to deduct the IRA, then the individual will pay less tax in 2019 as their income would be reduced by the IRA.

Additionally, individuals may also be participants in a retirement plan at work which can include a 401(k) and/or a profit-sharing plan. A 401(k) plan may contain contributions made by an employee through salary reduction (up to $19,000 in 2019 ($25,000 if the participant is age 50 or older)) or money provided by their employer which again in either case will not be taxed until this money is withdrawn by the employee.

There comes a point in time where the government says you’ve deferred taxes on this money long enough and now you must start to pay tax. Let me explain how this works.

The general rule is you must take a distribution by April 1 of the year following the calendar year in which you reach age 70 ½. Let’s say your 70^th birthday is May 1, 2019 and you therefore turn 701/2 on November 1, 2019. You would be required to take your first RMD by April 1, 2020 for year 2019. Also please remember that this distribution would be considered for year 2019.   In the first year you are allowed basically a 3 month extension as usually the distribution would have to occur during the year. Another consideration is if you do take the initial distribution after the calendar year (again our example has you taking a 2019 distribution in 2020), you will have to also take a 2020 distribution in 2020.  Every year but the very first year a distribution must be taken out prior to yearend.

If you are a participant in a 401(k), profit-sharing or 403(b) plan then you are required to withdraw your first RMD by April 1^st following the later of the year you reach age 701/2 or the year you retire. If you own 5% or more of the company you are not allowed to delay the payment until you retire you would have to begin distributions by April1st following the year you reach age 701/2.

It is important here to realize that there is no RMD when dealing with a Roth IRA until after the death of the participant. The reason for this rule is that the taxpayer took no deduction when he/she originally contributed to their Roth IRA. In addition, a Roth IRA grows tax free and the taxpayer never pays tax on the principal or earnings. Since the government will receive no taxes when the IRA is withdrawn, there is no RMD.

Inherited IRAs

According to the IRS if the IRA owner died before their Required Beginning Date, then:

If the spouse is the IRA’s only beneficiary:

A spouse has 3 options:

1. Roll it over into an IRA in the spouse’s name and begin RMDs down the road based on when the spouse attains age 70 ½. This method is applicable when the spouse is considered the owner of the IRA. If the spouse is a beneficiary but not treated as an owner, then one of the two methods discussed below must be used.
2. Life-expectancy method. The spouse must begin taking RMDs based on his/her own life expectancy by the later of:

December 31 of the year after the year of the IRA owner’s death.

December 31 of the year in which the IRA owner would’ve turned 70½.

1. 5-year method. You must redeem the entire account by the end of the fifth of the year after the year of the IRA owner’s death.

Qualified Beneficiaries

If you inherit the IRA, and are not the spouse, you have 2 options:

1. Life-expectancy method. You must begin taking RMDs by December 31 of the year after the IRA owner’s death, based on:

• Your life expectancy beginning with the age you reach in the year after the IRA owner’s death, if all beneficiaries have established their own accounts by December 31 of the year after the year of the IRA owner’s death.

• The life expectancy of the oldest beneficiary if not all of the beneficiaries have established their own accounts by December 31 of the year after the year of the IRA owner’s death.

2. 5-year method. You must redeem the entire account by by the end of the fifth year after the year of the IRA owner’s death.

According to the IRS if the IRA owner died after their Required Beginning Date, then:

Spouse, if the spouse is the IRA’s only beneficiary

If the spouse assumes the IRA, RMD calculations are based on their required beginning date. Again, this would be the case when the spouse decides they are the owner of the IRA. If the spouse is not considered the owner, then they must use one of the following methods:

If the spouse inherits the IRA, they must begin taking RMDs by December 31 of the year after the year of the IRA owner’s death, based on the longer of:

• The spouse’s life expectancy (recalculated each year), or
• The IRA owner’s remaining life expectancy.

You must take an RMD for the year of the IRA owner’s death if the owner hasn’t already taken one for that year.

Qualified Beneficiaries

If you inherit the IRA, and are not the spouse, you must begin taking RMDs by December 31 of the year after the year of the IRA owner’s death, based on the longer of:

• Your life expectancy, or
• The IRA owner’s remaining life expectancy.

You must take an RMD for the year of the IRA owner’s death if the owner hasn’t already taken one for that year.

There are additional rules that come into play when there is no designated beneficiary, such as if the money goes to an estate or trust. If the decedent did not begin their RMDs, then the money must be distributed over the life expectancy of the oldest trust beneficiary if the beneficiary is a trust or within 5 years following the death if there is no designated beneficiary. If the RMDs have begun, then the trust will have to withdraw the money over the longer of the life expectancy of the oldest beneficiary of the trust or the deceased owner’s remaining life expectancy. Estates will have to continue using the decedent’s remaining life expectancy which means the beneficiaries will probably have to pick up income more rapidly then if they had been named as beneficiaries.

Keep in mind the penalty for not taking an RMD is 50%.

Retirement minimum distributions can be very tricky and the penalties are massive, therefore please make sure to discuss the requirements with a tax professional well versed in the subject.