A required minimum distribution (RMD) is the minimum amount of money that you must withdraw from your retirement account each year after you reach a certain age. The RMD rules apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401 (k) plans, 403 (b) plans, and other types of retirement plans. The purpose of the RMD rules is to ensure that you do not defer taxes on your retirement savings indefinitely.
The age at which you must start taking RMDs depends on when you were born. If you were born before July 1, 1952, you must start taking RMDs by April 1 of the year following the year you turn 70½. If you were born on or after July 1, 1952, you must start taking RMDs by April 1 of the year following the year you turn 72. If you turn 72 in or after 2023, you must start taking RMDs by April 1 of the year following the year you turn 73. These dates are called your required beginning dates.
The amount of your RMD is calculated by dividing the balance of your retirement account as of December 31 of the previous year by a life expectancy factor published by the IRS. You can use the RMD Calculator to estimate your RMD amount.
You can withdraw more than the RMD amount from your retirement account, but you cannot withdraw less. If you fail to take your RMD by the deadline, you will have to pay a 50% penalty on the amount that you did not withdraw. You must report your RMD as taxable income on your tax return, unless it is from a Roth IRA or a designated Roth account. Roth IRAs and designated Roth accounts do not require RMDs until after the death of the owner.
SECURE 2.0 Act drops the excise tax rate to 25%; possibly 10% if the RMD is timely corrected within two years. The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return for the year in which the full amount of the RMD was required, but not taken.
The House Bill 1605, which took effect Saturday, allows Pennsylvania to seize some retirement accounts three years after they're presumed abandoned - regardless of the account owner's age.
Previously, the state waited until individuals reached age 70 1/2 before seizing retirement accounts and liquidating the portfolios. Now, older folks and famously contact-averse millennials could be affected.
But "someone in their 20s or 30s, who knows where his retirement account is but fails to check in on it regularly and who the Postal Service doesn't deliver mail to, could have his retirement assets turned over to the state three years after mail is returned to Vanguard," Woerth explained.
Vanguard recommends protecting your assets from being turned over to the state as unclaimed property by taking the following steps:
- Make sure all of your financial institutions have your current address, especially if you have recently moved.
- Inventory your current accounts, noting the financial institution at which each of them is held. If you have multiple accounts at multiple financial institutions, consider consolidating them.
- Most important, periodically contact your account providers - via phone, email, or letter, or by logging on to your account online at least once a year. That contact should be sufficient in Pennsylvania to prevent your assets from being turned over as unclaimed property.
Retirement Plan and IRA Required Minimum Distributions FAQs