Required Minimum Distributions
Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw each year once they reach a certain age. The starting age was 72. However, under Secure Act 2.0, the starting age for RMDs changes to 73 in 2023. In 2033, the starting age will change to 75.
Generally speaking, you take your first RMD at age 73, but that doesn’t mean you take it on your 73rd birthday. You have some flexibility on when you can start.
You must take your first RMD by April 1 of the year following the year in which you turn 73. All subsequent RMDs must be taken by 12/31 of their respective years.
As of 2023, there is some RMD penalty relief.
If required minimum distributions are not taken, the excise tax penalty is reduced to 25% for taxable years beginning in 2023. The penalty is further reduced to 10% if correction is made within two years after the end of the taxable year in which the distribution was missed.
When you pass away, your qualified account is passed on to your designated beneficiary. They have the option to take the account balance as a taxable lump-sum payout, but depending on their relationship to you, they may also have options to continue ownership of your account.
Eligible Designated Beneficiaries
- An “eligible designated beneficiary” is someone who meets one of the following criteria:
- Surviving spouse
- Disabled individual
- Chronically ill individual
- Minor child
- Individual who is not more than 10 years younger than the account owner
These individuals have a few options as beneficiaries:
- Take the balance as a taxable payout
- Continue the account as an inherited IRA and take RMDs based on their own life expectancy
- Surviving spouses have a third option -continue the account and delay RMDs until the later of the original account owners age 73 or their own age 73
Non-Eligible Designated Beneficiaries
Beneficiaries who don’t meet the criteria have a different set of options. These are basically non-spousal beneficiaries who are not minor children but are also more than 10 years
younger than the account owner. Very often, these beneficiaries are adult children.
They have the following options:
- Take the balance as a taxable payout.
- If the account owner already started RMDs, continue those RMDs and withdraw the balance within 10 years.
- If the account owner did not start RMDs, withdraw the account balance within five years.
You’re required to take distributions from your qualified accounts at age 73, but it’s possible you may not need then income. If so, what do you do with those RMDs? Or how can you avoid them altogether?
You have a few options…
Invest It
You can take your RMDs and invest them in either a non-qualified brokerage account or in a Roth IRA, if you meet the Roth eligibility requirements. You still have to pay taxes on the RMD, but you can potentially continue to grow the assets. If you contribute the funds to a Roth, you can leave them to your beneficiaries tax-free.
Convert It
Want to avoid RMDs altogether? One way to do that is by converting your traditional IRA to a Roth IRA. When you do this, you pay taxes on the converted amount. The balance is then contributed to a new Roth IRA, which does not have RMDs.
Donate It
You can donate to a charity directly from your IRA using something called a qualified charitable distribution (QCD). These distributions are transferred to the charity, so they aren’t counted as taxable income to you. That allows you to support your favorite cause, meet RMD requirements, and avoid income taxes on the RMDs.
