Required Minimum Distributions (RMDs): The Who, What, Why, and How 

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Required Minimum Distributions (RMDs): The Who, What, Why, and How 
Required Minimum Distributions, RMDs Age, How to Calculate RMD
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One minor headache you’ll have to manage with almost any retirement account— at some point, you’ve got to start distributing the funds. Sometimes that was your plan all along, but having to do so on the IRS’ timeline? Unfortunately, whether you want to take out the money or not, once you hit age 73 you’ll have to start taking required minimum distributions (or RMDs). Confused about the process, or unsure of what to do to get started? Have no fear— IRAR will help make RMDs easy to understand, no matter your level of IRA experience. 

What is a Required Minimum Distribution?

A required minimum distribution, or RMD, is the minimum amount you must withdraw from your retirement account each year once you reach a certain age. The amount is determined based on the value of each of your retirement accounts subject to this rule— not just your account(s) at IRAR. This distribution is considered income and will be included in your taxable income for the year— you will pay taxes on this amount, so prepare ahead of time. A Roth IRA holder on the other hand is not subject to this requirement.

Who Needs to Take an RMD?

If you are age 73 or older and you have an IRA that is not a Roth, you’re required to take an RMD. If you have a Beneficiary Roth account, there may be requirements to distribute after the original account owner’s death. Under the SECURE Act 2.0 the 10-year rule, beneficiaries must generally withdraw all funds from inherited IRAs (including Roth IRAs) within 10 years, unless they qualify as an eligible designated beneficiary (e.g. spouse, minor child, or disabled individual). 

Relevant: Inherited IRAs: Beneficiary Rules for Self-Directed Investors

When Do I Have to Start Taking My RMDs?

Required minimum distributions generally must be taken by December 31st for the tax year it applies— with one exception. The first year you take an RMD (the year you turn 73), you have until April 1st of the following year to take the initial RMD. However, you are still required to take an RMD for the next tax year by December 31st, essentially taking two RMDs in one year. For instance, if you turn 73 in May 2024, your first RMD must be taken by April 1, 2025, and your second by December 31, 2025. Keep in mind both of the distributions will be included as part of your taxable income for the year. 

Why Do I Need to Take an RMD?

The IRS allows IRAs (does not apply to Roth IRAs) to operate in a tax-deferred state— but they are deferred, not tax-free. The IRS requires distributions of a certain percentage each year, once you reach a certain age (age 73) which counts as income and is taxed as such.

But don’t think you can get away with not taking an RMD— the IRS has penalties for missing a required distribution. If you don’t take the required minimum distribution before the deadline, you’ll be penalized 25% of the amount you didn’t distribute. This penalty is in lieu of taking the distribution which would have been subject to tax. If this happens by mistake, there are opportunities to correct it and the penalty may be waived if the IRA holder had a reasonable reason for taking the distribution by the deadline. Another way to reduce the penalty to 10% is if the RMD was distributed by the end of the second year after the RMD was missed. 

How Do I Calculate My RMD?

Your RMD is based on the value of each of your retirement accounts, and must be calculated separately. IRA Resources can calculate your estimated RMD, but this will only be for the value of your IRAR accounts— if you have other retirement accounts at other institutions, those will need to be handled as separate calculations.

Also, it’s important to note that you don’t have to take your RMD in one lump sum. Both the IRS and IRA Resources allow you to take smaller amounts over the year, be that monthly, quarterly, or semi-annually, depending on what works for your retirement strategy. Once you have determined the total amounts you need to distribute, those can be distributed from an IRA you hold. 

If you’d like more resources regarding how to calculate your RMD, the IRS has some information. If you want, you can take out more than your required minimum distribution amount, but you can’t take less to avoid the penalty. You will be liable for taxes on these distributed funds or assets, as you would with your RMD.

Step-By-Step Guide to Required Minimum Distributions

Now that you understand a little bit more about the why behind RMDs, let’s walk through the process. At IRA Resources, the process is pretty simple. If you’re taking a cash distribution, all you’ll need is to complete and submit our Distribution Form. Then you’re done!

If you’re distributing assets in-kind (without liquidating them first), you’ll need to submit an updated Fair Market Valuation Form (for Real Estate, for LLCs/Private Placements) as well, before we can process your request. We’ll also need the re-registration paperwork for the asset, showing the new ownership in your name.

If you’re only distributing part of an asset, you will submit the same paperwork as if you are distributing the full asset, with one small change. When reregistering the asset, you’ll need to list the ownership percentages on the paperwork. For example, a deed to a rental property would be registered to read, “John Doe 10%, IRA Resources FBO John Doe 55-55555 90%”.) You can continue to do this each year for an asset until it is completely distributed, but it will need to be reregistered each year. If you’d like more information on partial distributions of real estate or other assets, this article has more information.

At IRA Resources, there are no fees for processing required minimum distributions. There is a delivery fee, which differs depending on how you choose to receive your funds: $10 for a check, $30 for a wire, and no charge for an ACH. You can see our fees in more detail if you have any questions.

Relevant: How to Take a Distribution or RMD from Your Real Estate IRA

Required Minimum Distribution Dilemmas: Common Questions

Sometimes it seems like a lot to remember with RMDs, but we’ve got you covered. We try to make the process as simple as possible, we love to help! Here are a few more tips to help you plan your RMD to perfection:

  • You Will Need to Pay Taxes on Your RMD

Clients sometimes forget they will need to pay taxes on the amount they distributed, causing some panic around tax time. Don’t let this be you! Plan and anticipate the additional income coming at tax time. We do give the option to withhold federal taxes at the time of distribution (not state taxes, unless you live in the state of California) to help alleviate this issue. However, you are still responsible for making sure all appropriate taxes are paid for your RMD, for both state and federal, and should verify when paying your taxes. You may want to consult with your tax advisor about this.

  • Difficulties Valuing Assets

Sometimes, especially with self-directed IRAs, it can be difficult to determine the value of the assets. This makes calculating and distributing the RMD difficult. Be aware of your asset’s type, their value, and keep them updated, especially when preparing to distribute— this can save major headaches when trying to take your RMD before the end-of-year deadline.

  • Taking RMDs From Multiple Accounts

You are not required to take your RMD from any one account. If you have more than one retirement account, your RMD can be distributed from any IRA you have, as long as you take the full required distribution amount, it doesn’t matter what account the funds come from. This is a nice workaround for clients with real estate or other tangible assets in their self-directed IRAs— if you have an account that holds cash, you can take the full amount from that account, without distributing your other assets.

By now, you’re basically an RMD expert! It can seem complicated to navigate (the IRS makes any process seem complicated), but it’s not as hard as it seems. With a required minimum distribution, you just need to prepare in advance. You know it’s coming, and you know when it’s coming (once you turn 73), you just need to anticipate and act. 

 

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