A required minimum distribution, or RMD, is a required withdrawal from a “qualified” account — that is, an account funded with pre-tax money, usually intended for retirement funding. It does not apply to Roth 401(k) or IRA accounts. For this article’s purposes, I will only be discussing personal retirement accounts, not those that are inherited.
People are often shocked when I tell them that they don’t own their 401(k)s, 457s, 403(b)s and IRAs. “Of course I do! They’re mine!” they protest. No, they’re not. You have partner(s) in those accounts: the federal government, and a state government if your state has an income tax. Be clear about this: The government always gets its share. It’s built into the structure of those accounts. At some point, you’ll be forced to take withdrawals from those accounts, whether you need the money or not. Why? Because the government wants its cut.
It used to be that you had to start taking RMDs during the year you turned 70.5. That’s changed. For anyone who has not reached 70.5 by the end of 2019, the required RMD age is now 72. The one exception is for accounts at places of employment where you are still working, and where you are not more than a 5% owner. And those who have started taking RMDs will have to continue to do so, even if they’re not 72 yet.
RMDs for 72-year-olds will now need to be taken by April 1. The amounts are based on an age factor in a government chart applied to the balance of the account as of December 31 of the previous year. This often gets confusing because you’re withdrawing money based on the past year’s balance, but your account’s custodian can help you.
There’s a planning issue here, too: Generally, the older you are, the more money you have to take out. This can create issues with increased taxes and/or increased Medicare premiums. With some foresight and planning, these negative consequences can be avoided. If you or someone you know needs help with RMDs, please reach out.