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Written by Jeffrey S. Gold, CPA |
For most retirement accounts such as IRAs and 401(k)s, the IRS requires owners to withdraw a certain amount of funds each year once a certain age is reached. This is known as the Required Minimum Distribution (RMD). Not every type of retirement account mandates account holders take RMDs annually—for example, RMDs are not required from Roth accounts. When an RMD is required, the year to begin distributions and the amount to distribute depend on the age and account balance of the owner.
When must RMDs start?
Prior to Secure Act 2.0, which became effective in 2020, RMDs were required to begin in the year the account owner turned 70½. Secure Act 2.0 changed that starting year to age 72, 73, or 75, depending on the year the account owner was born. This change helpfully removed the pesky half-year that taxpayers had to consider from the owner’s month of birth. For anyone who turned age 70½ after 2019, RMDs must now begin:
- at age 72 for those born in 1950 or earlier,
- at age 73 for those born 1951 through 1959, and
- at age 75 for those born after 1959.
How much RMD is required, and when must it be distributed?
RMDs are calculated using the total amount in the account as of the end of the prior year. To calculate an RMD for 2025, the account balance on December 31, 2024, is considered. That figure is divided by a value from one of three life expectancy tables provided by the IRS. Most owners will use the “Uniform Lifetime Table.” The other tables are used in special circumstances, such as for beneficiaries.
As an example, assume an owner born in 1952 (thus turning 73 in 2025) has a $1,000,000 balance on December 31, 2024. Using the Uniform table for age 73, the taxpayer should divide the account balance by 26.5 to arrive at an RMD amount of $37,736 for 2025. For the following year’s (2026) RMD, the account balance on December 31, 2025, is used with age 74 on the table (25.5). If the balance is $1,050,000 on December 31, 2025, the 2026 RMD will be $41,176.
RMDs of owners with multiple IRA accounts may be calculated in total for all IRAs and distributed from any one or more of the accounts—it is not necessary to calculate separate RMDs from each IRA. However, RMDs from other retirement accounts, such as 401(k) plans, 403(b) plans, and profit-sharing plans, must be calculated and distributed separately for each account.
With one exception, RMDs must be distributed by December 31 of the year for which they are calculated. The exception is for the first year that the RMD is required. The owner has until April 1 of the following year to receive that first distribution. In the example above, the first $37,736 distribution does not need to be made in 2025 but should be made by April 1, 2026. This would require taking two years of taxable RMD distributions in 2026 which may bring the owner into a higher tax bracket.
In the next edition of The Bottom Line, we will explain the steep penalties that may be imposed when RMDs aren’t properly distributed, and how they may be avoided or mitigated in some cases. We will also discuss the special RMD rules for IRAs and other retirement accounts inherited from decedents. The IRS recently issued final regulations regarding changes in these inherited RMD requirements enacted in Secure Act 2.0.
LMC is dedicated to staying updated on these developments and advising clients effectively. For more information or questions regarding Required Minimum Distributions, please reach out to your LMC professional.