What are Required Mandatory Distributions (RMDs)?

Spread the love

Defined contribution retirement accounts provide an enormous incentive for people.  This is because these accounts accumulate funds tax-deferred.  This tax referral must stop at some point, however, as the government wants to start collecting its tax revenue.  The required mandatory distributions come into play as a result.  

More about Required Mandatory Distributions

On the first day of the April after an IRA account owner turns 70 1/2 years of age, “required mandatory distributions” must occur.  These dates are important, but not for the owner of the account.  Rather, the dates matter for the beneficiaries.  Why?  After the owner dies, the required beginning date determines the applicable distribution period.  

RMDs must be taken from an IRA no later than December 31 of each calendar year.  It does not matter if the account owner is working or retired.  If you do not take out the RMD, this equates to a 50% penalty based on the RMD amount!! 

What accounts are impacted by Required Mandatory Distributions?

Traditional IRAS, 401(k) and 403(b). 

What is not subject to Required Mandatory Distributions

Roth IRAs, during the owner’s lifetime.

How Required Mandatory Distributions Work

During the account owner’s lifetime, you start with the prior calendar year’s December 31 account balance.  You then divide it by a divisor set forth in the applicable IRS table (generally the Uniform Life Table but can also be the Joint and Last Survivor Table).  This is based on the account owner’s age. 

How to determine the account balance?

Your IRA custodian will provide the year-end value.

Anything I should keep in mind?

Yes.  You should be cognizant of the following things:

  1. An owner is allowed to pay required mandatory distributions for all IRA accounts from any one or more accounts.
  2. One cannot combine inherited IRAs with those held as “owner.”
  3. Qualified plans do not have the same flexibility.  They require that each separate plan calculate and distribute an RMD.

Will the law change?

Maybe.  Proposed legislation may change the post-death required mandatory distribution rules for IRAs, qualified plans and other retirement plans.  Ask your accountant or Financial Planner to keep you abreast of all tax changes. 

Based out of Tampa, Florida, Lori is mom to a fantastic 5-year-old boy. They love to go on local adventures, travel and play with matchbox cars for seemingly endless hours. Lori enjoys reading classic novels, organic gardening, and studying languages with her son. She considers herself well-versed in Seinfeld and welcomes any trivia!

Disclaimer: The Law Office of Lori Vella’s website contains general information directed to Florida residents. This firm does not intend to give legal advice through its pages and/or blog. If you need legal advice, we encourage you to find an attorney licensed in your state. This language on this website does not create an attorney-client relationship between you and this firm.

Leave a Comment

Your email address will not be published. Required fields are marked *