What Are Required Minimum Distributions?
Some clients are surprised when they learn that the IRS forces them to take “required minimum distributions” – known as RMDs – after they turn age 70½. When they don’t need the money to spend, they question why the government makes them take money out of their IRAs.
The answer is that the government wants to finally get some tax revenue, after allowing these accounts to grow tax-deferred over many years and giving a tax break on the contributions.
There are specific rules for different retirement accounts. Many people have more than one retirement account, and wonder whether the RMDs can be combined and taken from just one account or if they need to come out of each account separately.
The IRS requires that RMDs be calculated for each account separately. They allow some types of accounts to be aggregated, so those RMD amounts can be added together and the distribution can be taken in any proportion from one or more of the aggregated accounts.
However, RMDs for one type of account can never be taken from a different type of account. For example, a RMD from a 401(k) cannot be taken from an IRA, and an RMD from an IRA cannot be taken from a 403(b) account. This is a common mistake.
IRA RMDs can be transferred from one IRA account to another. A transfer is when the IRA funds go directly from one financial institution to another. The RMD can then be taken later in the year, but it must be taken out.
You must take your RMD once you are 70½. The penalty for not taking the RMD is 50%.