What Are Required Minimum Distributions (RMDs)?

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A Required Minimum distributions (RMD) is a mandatory minimum amount that a retirement plan participant must withdraw annually. The account holder must begin these withdrawals at age 70.5 or, if later, during the first year of retirement. The retiree must then withdraw the RMD amount each subsequent year based on the current RMD calculation. Prior to the required distribution period beginning, the assets subject to RMDs typically grow tax deferred. When they are distributed from the account via RMD, the distribution is counted as ordinary income for Federal tax purposes.


Who Must Take RMDs?

Starting at age 70½, owners of a Traditional IRA, SIMPLE IRA, SEP IRA, or retirement plan account must begin making RMD withdrawals from their accounts. RMD rules apply to all employer sponsored retirement plans including 401(k) plans, 403(b) plans, and 457(b) plans and a distribution must be taken by Dec. 31st.

There is no RMD requirement for Roth IRAs during the lifetime of the original owner. If you have an inherited IRA, there are different rules for those inherited assets and you may be required to begin distributions by a certain date.


What happens if a person does not take a RMD by the required deadline?

These withdrawals are mandatory and violations incur severe penalties. If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%.


How are RMDs Calculated?

Although the IRA custodian or retirement plan administrator may calculate the RMD, the IRA or retirement plan account owner is ultimately responsible for calculating the amount of the RMD. Follow the steps below to calculate your RMD:

1. Read Table: find your age in the IRS Uniform Lifetime Table

2. Determine Factor: locate the corresponding life expectancy factor.

3. Calculate RMD: divide your retirement account balance as of December 31 of the prior year by your life expectancy factor.


In Summary

For those participating in qualified retirement plans, RMDs begin in the year in which you turn 70.5. Failure to take the required distribution prior to calendar year end can have significant tax repercussions. Please contact your advisor if you have not taken your distribution yet this year.


Authored by Michael Bogard, CFA on November 15, 2019

About the Author: Michael Bogard, CFA is a Business Development / Client Relationships Senior Associate at Heck Capital Advisors. Michael earned the right to use the Chartered Financial Analyst® (CFA®) designation after completing the program, fulfilling the work experience requirements, and gaining acceptance as a member of the CFA Institute. The Chartered Financial Analyst® (CFA®) charter gives a strong understanding of advanced investment analysis and real-world portfolio management skills. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.


Heck Capital is an independent, Registered Investment Advisory Firm providing comprehensive investment management, personalized advice, and strategic financial guidance since the 1950s. We serve goal-driven individuals, families, established institutions, non-profit organizations, and foundations/endowments; striving to help our clients achieve their investment objectives, helping to simplify their financial lives, with the goal to create lasting legacies.