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What are RMDs (Required Minimum Distributions)?

What are RMDs (Required Minimum Distributions)?

May 04, 2023

Retiring is an exciting time. You finally have the freedom to do whatever you want, whenever you want. All those years of saving and investing your money wisely are finally paying off! But, as you probably already know from doing your research, before you decided which retirement savings plan was best for you, there can be a lot of “fine print” things to consider. One such element is RMDs.

Newly retired and not familiar with the ins and outs of RMDs? While there are rules that apply to them, they are not as confusing as they first appear. Today, we'll cover what an RMD is, what types of retirement plans have them, how Roth IRAs differ, and how you can calculate your own RMD.

What is an RMD

So, what is an RMD? As you've gathered from the title, RMD stands for Required Minimum Distribution. Put simply, it's the amount of money you have to withdraw from certain retirement accounts each year to avoid tax penalties. This applies only to accounts after you reach a certain age. The age at which retirement account owners must begin taking RMDs has increased from 72 to 73, effective in 2023. Investors who turned 72 in 2022 or earlier will need to continue to take RMDs as scheduled. If a client turned 72 in 2022 and delayed their RMD until 2023, they are still required to take it by April 1, 2023, plus take their 2023 distribution in 2023.

It's also worth noting that you can take out more than the minimum amount if you desire. Also, if you have more than one savings account, you will likely need to calculate a separate RMD for each subsequent one.

You might be wondering what exactly is the purpose of RMDs. Basically, they are to prevent people from avoiding paying taxes. It's very important to withdraw RMDs on time. Starting in 2023, RMD penalties for those who fail to take their distribution will decrease from 50% to 25% of the RMD amount not taken. The penalty is reduced to 10% for IRA owners if corrective action is taken in a timely manner.

Types of Retirement Plans that Have RMDs

Most employer-sponsored retirement plans are subject to RMDs. They include:

  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Traditional IRAs
  • SEP IRAs
  • Simple IRAs
  • Thrift Savings Plans

Starting in 2024, Roth accounts held in employer retirement plans will be exempt from RMD requirements

All of these plans require you to start withdrawing RMDs at the same age (73). In some cases, there may be special exceptions according to the rules of your plan. For instance, you may not have to worry about RMDs until after 73 if you have not retired by then.

So long as it hasn't already been taxed, withdrawals from your retirement accounts will count as taxable income.

Roth IRAs and RMDs

As mentioned above, Roth IRAs operate a little differently than other types of retirement plans. 

Beneficiaries who are not considered eligible designated beneficiaries (EBDs) and subject to the 10-year rule will now be required to take distributions in years 1 through 9 and then deplete the account by December 31 of the 10th year of death. Per IRS Notice 2022-53 (which has not been published but indicates the intent to issue final regulations), beneficiaries who failed to take distributions in 2021 and 2022 will NOT be subject to a 50% penalty. The IRS has not yet issued any guidance or instruction indicating that those who did not take distributions in 2021 and 2022 are required to make up those distributions.

There are some ways that may ease what could be a financial burden for your loved ones. Look into Inherited IRAs or lump-sum distributions from the Roth IRA.

2023 Contribution Limit Increases

  • Traditional IRA and Roth Contribution limits have increased from $6,000 to $6,500. Those who are 50 and over still have a $1,000 contribution catch-up limit.
  • The basic salary deferral amount for 401(k) and similar workplace plans is $22,500, with a $7,500 catch-up amount for those 50 or older.
  • Contributions an employer can make to an employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $66,000 for 2023, an increase from $61,000 in 2022.
  • The amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500. For employees age 50 or over, a $3,500 catch-up contribution is also allowed.
  • The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan will increase to $22,500. It will increase to $30,000 in 2023 for those age 50 or older.
  • Additional information on 2023 changes for retirement plan contributions can be found on the IRS website.

Calculate Your RMD

Now that you have more background information on RMDs, you may be wondering how to calculate one so that you don't receive any penalties. Fortunately, there are plenty of resources to help you calculate these.

First of all, your RMD takes into account your retirement plan's balance at the end of the previous year and your life expectancy. There are several RMD tables that can be referenced, depending on your marital status and your beneficiary's relationship to you. These RMD worksheets from the IRS are also very helpful. Plus, it's important to use these every year so you have the latest information so no miscalculations are made.

Contact Benefit & Financial of Flagstaff, AZ

Required Minimum Distributions can seem like a hassle, but so long as you keep a record of your account balances, set a reminder for the RMD date, and use the appropriate RMD calculator from the IRS, you won't have to face the worry of tax penalties on your hard-earned money.

If you're still feeling overwhelmed, Benefit and Financial is happy to help. We have been working with the residents of Flagstaff, AZ and beyond for all of their personal and business financial needs for over 30 years. From retirement planning to group benefits for employees, our professionals are eager to help you achieve your financial goals. Give us a call or send an email today with any questions you may have or to schedule an appointment.