Understanding and Planning Your Required Minimum Distributions


A required minimum distribution (RMD) is the quantity of funds that owners and eligible retirement plan participants of retirement age must draw from an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE individual retirement account (IRA). The withdrawal age from retirement accounts increased from 70 1/2 to 72 years old in 2020. As a result, you must start collecting from a retirement account by April 1 of the year after you turn 72. The retiree must then draw the RMD amount based on the current RMD formula each year afterward.


Understanding RMDs

A required minimum distribution (RMD) prevents people from utilizing a retirement plan to perpetually escape taxes. Required minimum distributions are calculated by dividing the previous year-end fair market value (FMV) of the retirement account by the corresponding distribution period or life expectancy. The Internal Revenue Service (IRS) offers a spreadsheet to help people figure out how much money they need to withdraw. In most cases, your account manager or plan administrator will analyze and submit these amounts to the IRS.

Certain eligible plans enable members to postpone the commencement of their RMDs until they retire, even if they are beyond the age of 72. Individuals in qualified plans should check with their employers to see if they are eligible for this deferment. It should be emphasized that while account holders must withdraw the mandatory minimum distribution amount, they may also withdraw more. If the account holder wishes to remove the whole balance in the first year, that is lawful, but the tax bill might be a surprise.


How to Calculate RMDs

When determining a required minimum distribution for any particular year, check the IRS website to ensure you use the most recent calculation worksheets. These tables are kept up to date with changes in the average lifespan. Different conditions need the use of different calculation tables. For instance, IRA account holders whose wife is the account's sole beneficiary and is more than ten years younger than the account owner utilize a different table than other account owners. The RMD calculation for traditional IRA account holders consists of three steps:

  1. Make a note of the account's balance as of December 31st of the preceding year.

  2. Determine the distribution factor on the calculation tables that match your age on your current year's birthday. This factor number varies from 27.4 to 1.9 for the majority of individuals. The factor number decreases as a person ages.

  3. To calculate the RMD, divide the account balance by the factor number.


Example of RMD Calculations

For example, Allen, a 74-year-old account holder, celebrates his birthday on October 1. Allen's IRA is valued at $325,000 and had a balance of $305,000 on December 31, the prior year. According to the IRS required distribution worksheet, the distribution factor is 23.8 for age 74 and 22.9 for age 75.

The RMD is calculated as:

RMD = $305,000 ➗22.9 = $13,318.77

As a result, Allen must withdraw at least $13,318.77.

There are a few additional things Allen should remember. Assume he has many IRAs. This means that the RMD must be generated individually for each account. He may aggregate the total RMDs required from each account and take a larger distribution from a single IRA if he wishes.


What if I Don’t Take an RMD?

What happens if a person does not take an RMD by the required deadline? If an account owner fails to withdraw an RMD, fails to withdraw the total amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.1. It is important to get the distribution calculations correct because this is the largest tax penalty in the tax code.


Need More Guidance?

We hope that you found the information in this article on required minimum distributions helpful and informative. However, if you feel like you need more guidance, we’re here to help. Here at Fourth Avenue Financial, our first priority is your overall financial success. We want to help you develop, implement, and monitor a strategy designed to address your individual situation to ensure all your investments are setting you up for a path of financial success. If you are ready to start planning for your financial future, we are here to help. Contact us today at (304) 746 7977 to schedule a meeting with one of our experienced financial advisors or schedule online: https://calendly.com/fourthavenuefinancial/introductory-zoom.


Securities are offered through J.W. Cole Financial, Inc. (JWC) Member FINRA / SIPC. Advisory Services are offered through J.W. Cole Advisors, Inc. (JWCA). Fourth Avenue Financial and JWC/ JWCA are unaffiliated entities.


  1. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions#:~:text=List%20of%20FAQs-,What%20happens%20if%20a%20person%20does%20not%20take%20a%20RMD,withdrawn%20is%20taxed%20at%2050%25.

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