IRA Required Minimum Distributions
Encyclopedia
Required Minimum Distributions, often referred to as RMDs, are amounts that the federal government requires you to withdraw annually from traditional IRAs
and employer-sponsored retirement plans
.
s, but after-death distributions (below) are required. They can always withdraw more than the minimum amount from your IRA or plan in any year, but if they withdraw less than the required minimum, they will be subject to a federal penalty. The IRS
penalty is an excise tax
equal to 50% of the amount they should have withdrawn. This penalty is in addition to ordinary income at the individual's marginal rate
and any state income tax
es.
Congress in December, 2008 passed legislation suspending the minimum distribution requirements that are due for the 2009 calendar year. This legislation did not suspend RMDs that were due for 2008, including those due by April 1, 2009. The minimum distribution requirements returned for tax year 2010 going forward.
The RMD rules are designed to spread out the distributions of your entire interest in an IRA or plan account over your life expectancy
or the joint life expectancy of you and your beneficiary. The purpose of the RMD rules is to ensure that people don't just accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. Instead, required minimum distributions force you to withdraw at least some of the funds as taxable distributions during your lifetime.
Unlike most distributions from IRAs and qualified plans, RMDs are never eligible for rollover; they must be withdrawn. However, because the distributions are not rollover-eligible, taxes are not required to be withheld at the time of distribution, and may thus be postponed until the individual files an income-tax return for the year. Any amount withdrawn ABOVE the minimum required amount will be eligible for rollover within 60 days of the distribution. Income tax must be withheld from that portion if the rollover option is not elected.
Employer-sponsored qualified retirement plans, such as 401(k) plans, require the same distributions that IRAs do. However, the beginning date requirement may be later than the date for IRAs. While IRAs require RMDs to begin by 4/1 of the year after the individual reaches age 70½, participants in an employer-sponsored plan can usually wait until 4/1 of the year after their retirement (if later than age 70½) to begin distributions UNLESS the individual owns 5% or more of the employer who is sponsoring the plan.
In addition, employer-sponsored plans differ from IRAs in rules relating to aggregation. A person with multiple IRAs may add the balances in each account to determine the total RMD for the year, then take that full amount from a single IRA, or split it in any manner between two or more IRAs. However, employer-sponsored plans must remain distinct; the RMD calculation for each is performed separately, and the distributions must be taken from each plan individually.
Congress in December, 2008 passed legislation suspending, for 2009 only, the requirement of minimum distributions. The minimum distribution requirements returned for tax year 2010 going forward.
IRA beneficiaries do not require a nonspouse rollover; an IRA beneficiary can have a decedent's IRA retitled as an inherited IRA without a "rollover" transaction. (Spouses have much greater rollover rights and can delay distributions until their own age 70½ if they so choose.) A nonspouse IRA beneficiary must either begin distributions by the end of the year following the decedent's death (they can elect a "stretch" payout if they do this) or, if the decedent died before 4/1 of the year after he/she would have been 70½, the beneficiary can follow the "5-year rule." The suspension of the RMD requirements for 2009 (as described above in December 2008 legislation) also means that when counting the 5-year rule, 2009 is disregarded.
The 5-year rule does not apply if the decedent died after having started his/her required minimum distributions (generally if he/she died later than 4/1 after reaching age 70½). In that case, there is NO 5-year rule, and the beneficiary takes distributions over the longer of his/her own life expectancy or the remaining life expectancy that the decedent would have had (using government tables). Many taxpayers are misinformed by advice that they must take all of their distribution from an elderly relative's IRA in a 5-year period. If the IRA owner named a non-person (such as his estate) as the beneficiary, and had died after beginning required minimum distributions, then the estate or other non-person beneficiary may take distributions over the remaining life expectancy the decedent would have had.
However, if the decedent died BEFORE age 70½ and the beneficiary does not start a lifetime payout by the end of the year after death, the 5-year rule does apply. Also, if the decedent died before that date and had no beneficiary (for example if he/she named the estate as beneficiary, or a charity) the 5-year rule applies. Many retirement plans also trigger the 5-year rule.
The 5-year rule states that the entire account balance must be withdrawn over a 5 year period. It does NOT require a certain amount each year, or an even division between the five years. However, with the 5-year distribution method, the entire remaining balance becomes a required distribution in the fifth year. If a decedent has named his/her estate or a charity as beneficiary and the 5-year rule applies, no "stretch" payout is possible. If an estate or charity is beneficiary of a part of the account, the same holds true unless certain remedial measures are taken by September 30 of the year after death.
This is just a brief overview of rules based on Internal Revenue Code
Section 401(a)(9). The rules take up dozens of pages of Treasury regulations at Treas. Regs. 1.401(a)(9)-1 to -9 and 1.408-8. (See TD 8987, Federal Register
, volume 67, beginning at page 18988, dated April 17, 2002.) The nonspouse rollover rules were passed in Section 829 of the Pension Protection Act of 2006, and interpreted by IRS Notice 2007-7, 2007-5 IRB 1.
Individual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
and employer-sponsored retirement plans
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
.
Lifetime distributions
Individuals with IRAs are required to begin lifetime RMDs no later than April 1 of the year after they reach age 70½ (or, for most employer plan participants, after they retire). They do not have to take lifetime distributions from Roth IRARoth IRA
A Roth IRA is a special type of retirement plan under US law that is generally not taxed, provided certain conditions are met. The tax law of the United States allows a tax reduction on a limited amount of saving for retirement. The Roth IRA is named for its chief legislative sponsor, Senator...
s, but after-death distributions (below) are required. They can always withdraw more than the minimum amount from your IRA or plan in any year, but if they withdraw less than the required minimum, they will be subject to a federal penalty. The IRS
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
penalty is an excise tax
Excise
Excise tax in the United States is a indirect tax on listed items. Excise taxes can be and are made by federal, state and local governments and are far from uniform throughout the United States...
equal to 50% of the amount they should have withdrawn. This penalty is in addition to ordinary income at the individual's marginal rate
Marginal tax rate
In a tax system and in economics, the tax rate describes the burden ratio at which a business or person is taxed. There are several methods used to present a tax rate: statutory, average, marginal, effective, effective average, and effective marginal...
and any state income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
es.
Congress in December, 2008 passed legislation suspending the minimum distribution requirements that are due for the 2009 calendar year. This legislation did not suspend RMDs that were due for 2008, including those due by April 1, 2009. The minimum distribution requirements returned for tax year 2010 going forward.
The RMD rules are designed to spread out the distributions of your entire interest in an IRA or plan account over your life expectancy
Life expectancy
Life expectancy is the expected number of years of life remaining at a given age. It is denoted by ex, which means the average number of subsequent years of life for someone now aged x, according to a particular mortality experience...
or the joint life expectancy of you and your beneficiary. The purpose of the RMD rules is to ensure that people don't just accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. Instead, required minimum distributions force you to withdraw at least some of the funds as taxable distributions during your lifetime.
Unlike most distributions from IRAs and qualified plans, RMDs are never eligible for rollover; they must be withdrawn. However, because the distributions are not rollover-eligible, taxes are not required to be withheld at the time of distribution, and may thus be postponed until the individual files an income-tax return for the year. Any amount withdrawn ABOVE the minimum required amount will be eligible for rollover within 60 days of the distribution. Income tax must be withheld from that portion if the rollover option is not elected.
Employer-sponsored qualified retirement plans, such as 401(k) plans, require the same distributions that IRAs do. However, the beginning date requirement may be later than the date for IRAs. While IRAs require RMDs to begin by 4/1 of the year after the individual reaches age 70½, participants in an employer-sponsored plan can usually wait until 4/1 of the year after their retirement (if later than age 70½) to begin distributions UNLESS the individual owns 5% or more of the employer who is sponsoring the plan.
In addition, employer-sponsored plans differ from IRAs in rules relating to aggregation. A person with multiple IRAs may add the balances in each account to determine the total RMD for the year, then take that full amount from a single IRA, or split it in any manner between two or more IRAs. However, employer-sponsored plans must remain distinct; the RMD calculation for each is performed separately, and the distributions must be taken from each plan individually.
After death distributions
Distributions after death must be made to the named beneficiary of the decedent's IRA or qualified plan. Legislation passed in 2006 allows qualified retirement plans to be amended to offer a "nonspouse rollover." If the rollover is available, the beneficiary may make a direct transfer of the funds to an inherited IRA, which must be in the name of the decedent for the benefit of the named beneficiary. This became effective beginning in 2007.Congress in December, 2008 passed legislation suspending, for 2009 only, the requirement of minimum distributions. The minimum distribution requirements returned for tax year 2010 going forward.
IRA beneficiaries do not require a nonspouse rollover; an IRA beneficiary can have a decedent's IRA retitled as an inherited IRA without a "rollover" transaction. (Spouses have much greater rollover rights and can delay distributions until their own age 70½ if they so choose.) A nonspouse IRA beneficiary must either begin distributions by the end of the year following the decedent's death (they can elect a "stretch" payout if they do this) or, if the decedent died before 4/1 of the year after he/she would have been 70½, the beneficiary can follow the "5-year rule." The suspension of the RMD requirements for 2009 (as described above in December 2008 legislation) also means that when counting the 5-year rule, 2009 is disregarded.
The 5-year rule does not apply if the decedent died after having started his/her required minimum distributions (generally if he/she died later than 4/1 after reaching age 70½). In that case, there is NO 5-year rule, and the beneficiary takes distributions over the longer of his/her own life expectancy or the remaining life expectancy that the decedent would have had (using government tables). Many taxpayers are misinformed by advice that they must take all of their distribution from an elderly relative's IRA in a 5-year period. If the IRA owner named a non-person (such as his estate) as the beneficiary, and had died after beginning required minimum distributions, then the estate or other non-person beneficiary may take distributions over the remaining life expectancy the decedent would have had.
However, if the decedent died BEFORE age 70½ and the beneficiary does not start a lifetime payout by the end of the year after death, the 5-year rule does apply. Also, if the decedent died before that date and had no beneficiary (for example if he/she named the estate as beneficiary, or a charity) the 5-year rule applies. Many retirement plans also trigger the 5-year rule.
The 5-year rule states that the entire account balance must be withdrawn over a 5 year period. It does NOT require a certain amount each year, or an even division between the five years. However, with the 5-year distribution method, the entire remaining balance becomes a required distribution in the fifth year. If a decedent has named his/her estate or a charity as beneficiary and the 5-year rule applies, no "stretch" payout is possible. If an estate or charity is beneficiary of a part of the account, the same holds true unless certain remedial measures are taken by September 30 of the year after death.
This is just a brief overview of rules based on Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
Section 401(a)(9). The rules take up dozens of pages of Treasury regulations at Treas. Regs. 1.401(a)(9)-1 to -9 and 1.408-8. (See TD 8987, Federal Register
Federal Register
The Federal Register , abbreviated FR, or sometimes Fed. Reg.) is the official journal of the federal government of the United States that contains most routine publications and public notices of government agencies...
, volume 67, beginning at page 18988, dated April 17, 2002.) The nonspouse rollover rules were passed in Section 829 of the Pension Protection Act of 2006, and interpreted by IRS Notice 2007-7, 2007-5 IRB 1.