Demystifying Required Minimum Distributions

Part of a successful and happy retirement is making the most of your fixed income. In addition to Social Security, which retirees start to draw on between ages 62-67, you may also expect to receive income from retirement savings and investment accounts. Many individuals want to avoid drawing on these resources as long as possible, especially as we expect to live longer than generations in the past. This is why the concept of required minimum distributions is important for those approaching or entering retirement to understand.

What is a Required Minimum Distribution?

A required minimum distribution is the amount you are required by law to withdraw from a retirement account each year. This requirement exists because many deposits to retirement accounts are made pre-tax, and eventually, the IRS wants to be able to tax those dollars. This is why a required minimum distribution will be added to your taxable income. Talk with a financial professional about what that means for your taxes and social security. You can withdraw more than this amount, but you can’t withdraw less.

What Retirement Accounts Have Required Minimum Distribution?

Almost every type of retirement account has a required minimum distribution. The only exception is a Roth IRA, which does not require a withdrawal until after the death of the owner. That is because those contributions are made post-tax, so the IRS isn’t worried about taxing them. Otherwise, all these accounts are subject to required minimum distributions:

401(k) Plan

403(b) Plan

457(b) Plan

Traditional IRA

SIMPLE IRA

SEP IRA

Defined Benefit Plan

If you have one or more of these accounts, you will eventually be required to withdraw a certain amount from savings each year and pay taxes on that withdrawal.

What is the Age for Required Minimum Distribution?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019 affected the age that individuals are required to take minimum distributions. If you were born after June 30, 1949, you are required to take required minimum distributions on April 1 during the calendar year after you turn 72. If you were born before July 1, 1949, you are already taking required minimum distributions, or you will start as of April 1, 2020.

What Amount is the Minimum Required Distribution for Retirees?

The required minimum distribution you are required to withdraw depends on the account balance(s) at the end of the immediately preceding year. Remember that each account will have its own minimum distribution. Your retirement plan administrator, plan sponsor, or financial adviser should help you with this calculation. Figuring out the exact dollar amount required to be withdrawn relies on the IRS’ Uniform Life Table, which factors in your age, your marital status, and even how far apart in age you and a spouse might be. It’s important to get a professional’s help because if you do not take enough of a distribution, you may be charged as much as a 50% penalty on the amount that was not withdrawn.

Do I Have to Spend my Minimum Required Distribution?

If you have to take more than one required minimum distribution in a year, this could impact your tax status and your Social Security eligibility. While many choose to take these distributions in cash, the option of a qualified charitable distribution allows you to transfer as much as $100,000 directly from the account to a charity, thereby satisfying the IRS requirements without increasing your tax liability. Otherwise, once the distribution is taken as cash, you can spend or save it however you wish.

Understanding required minimum distributions is just one of the pieces of knowledge seniors need to successfully plan and prepare for retirement.