Retirement Planning

Five Things You Should Know About RMDs

November 20, 2017
Once investors turn age 70½, they will need to take required minimum distributions (RMDs) from their retirement accounts, whether they need the money or not.

Key Points

  • For IRAs, you must take your first RMD by April 1 of the year after the year you turn age 70½—regardless of whether or not you are retired. For each following year, you must take an RMD by December 31.
  • If you have multiple IRAs, you must calculate the appropriate RMD for each one. The total distribution amount can be taken from one or more IRAs to satisfy the withdrawal—as long as the total RMD amount is withdrawn.
  • If you have multiple prior employer retirement accounts (401(k)s, etc.) you will have to contact your prior employer to calculate the RMD and send you a distribution.
  • Once the RMD is distributed, you don’t have to spend it, but it cannot remain in the tax-deferred account.

Generally, beginning at age 70½, retirement account holders are required to take RMDs from their tax-deferred retirement accounts. These include Traditional, Rollover, SEP, and SIMPLE IRAs and employer-sponsored retirement plans. You must pay federal, and sometimes state, income taxes on the taxable amounts of these distributions.

“RMDs aren’t optional,” says Keith McGurrin, CFP®, a lead financial planner with T. Rowe Price. “If you don’t take your RMD, or take out too little, you may be faced with an IRS penalty tax of 50% of the amount not distributed.”

Below are five things you should know about RMDs:

1. WHEN DO I NEED TO TAKE THE FIRST RMD?

For IRAs, you must take your first RMD by April 1 of the year after the year you turn 70½—regardless of whether or not you are retired. For each following year, you must take an RMD by December 31.

“The distribution can be taken in one lump sum or spread throughout the year as long as the RMD amount is distributed by the due date,” McGurrin says. “Many IRA holders who spend their RMDs prefer to take monthly distributions.”

These distributions are generally included in your taxable income. Any distributions made through December 31 will be taxed in the current year. For this reason, many IRA holders choose to take their first distribution by December 31 of the year they turn age 70½.

Required beginning dates for RMDs from an employer plan vary depending on plan rules. You might not be required to take your first RMD until the later of April 1 of the year following the year you reach age 70½ or the year you retire from work with that employer. Please note that you must take each RMD for a qualified employer-sponsored plan from that plan. You may not take the amount from an IRA.

EXAMPLE:

Mary was born on March 1, 1947, and turned age 70½ on September 1, 2017. This means her first RMD should be taken by April 1, 2018, which counts as the RMD for 2017. Her second RMD for 2018 needs to be taken by December 31, 2018. In this example, if Mary takes the two distributions in 2018, both will be included in her taxable income for 2018.

2. WHICH ACCOUNTS REQUIRE DISTRIBUTIONS?

Most commonly affected accounts that require RMDs include:

If you’re working at age 70½ and have assets in an employer-sponsored retirement plan at your current job, you may be able to delay taking distributions from that account until April 1 of the year after the year you retire.

3. HOW DO I CALCULATE THE RMD?

You need to calculate your RMD each year because it is based on your current age and account balance at the prior year-end.

For IRAs and 403(b) plans, the account owner is responsible for calculating and taking RMDs. T. Rowe Price offers a free online calculator to help with this, or you can use the IRS Publication 590-B and use Appendix A: Worksheet for Determining RMDs.

T. Rowe Price also offers the RMDNavigator® service, which is a free service for our IRA holders to set their RMDs on autopilot by having it calculated and distributed each year.

The employer is responsible for determining the RMD amount from qualified employer plans (e.g., 401(k)s) and distributing the RMD.

4. I HAVE MULTIPLE IRAs. HOW MANY RMDs DO I NEED TO TAKE?

If you have multiple IRAs, you must calculate the appropriate RMD for each one. However, the total distribution amount can be taken from one or more IRAs to satisfy the withdrawal—as long as the total RMD amount is withdrawn.

So, if you have three different IRAs, you can take the whole RMD distribution from just one account. The 403(b) plan rules mirror IRA rules in that the total distribution from multiple 403(b) plans can be taken from one or more of the 403(b) accounts.

It’s different with 401(k)s. If you have multiple 401(k)s from prior jobs, each plan will calculate the RMD and send a distribution.

“Before age 70½ is a great time to review your retirement account structure and consolidate the number of accounts when possible,” McGurrin says.

TIP: While planning to take your RMDs, it’s a good time to review the beneficiary designations on all your retirement accounts as well.

5. WHAT IF I DON’T NEED TO SPEND THE DISTRIBUTION? WHAT DO I DO WITH IT?

Once the RMD is distributed, you don’t have to spend it if you don’t need to, but it cannot remain in the tax-deferred retirement account. If you are considering ideas of where to keep this distribution, you can:

  • Reinvest the money in a regular, taxable account. Add it to your rainy day fund or invest for the longer term.
  • Invest in your grandchild’s future by using the funds to contribute to a 529 college savings plan or adding to one that’s already been established.
  • Although RMD amounts are not eligible to be rolled directly to another retirement plan or converted to a Roth IRA, you could contribute the funds to a Roth IRA if you have earned income and meet the contribution limits.
  • Be charitable. You can have your RMD sent directly to your favorite qualified charity and not include the amount as taxable income (up to $100,000). Or take the RMD, donate the cash to a qualified charity, and then claim the income tax deduction if you itemize.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the author as of November 2017 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance cannot guarantee future results. All investments involve risk. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., Distributor.

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