Required minimum distributions

Many retirement accounts, like traditional IRAs and employer-sponsored 401(k) plans allow you to postpone paying taxes on pre-tax contributions you made to the account, plus earnings, until you start taking distributions. That’s why they’re called tax-deferred retirement accounts, and they’re a great way to help you save for retirement. But the IRS will eventually get those deferred tax dollars from you — thanks to a rule called Required Minimum Distributions, or “RMDs.”

Be ready when your RMDs kick in

The whole point of tax-deferred retirement accounts is to accumulate more money for retirement by not paying current taxes on contributions you make to the account, plus earnings. But when you take money out of these accounts, the amount you receive will be subject to federal income tax. Tax laws require you to begin taking minimum, annual withdrawals from your tax-deferred retirement accounts once you attain a certain age, whether you need the money or not.  However, for employees who are not considered a 5% owner, the RMD from an employer-sponsored qualified plan can be delayed until retirement.

For years, the age at which RMDs began was tied to the calendar year following the calendar year in which you attained age 70-1/2.  However, The SECURE Act of 2019 and SECURE 2.0, which passed in 2022, have made changes to the RMD age, depending on the year in which you were born.

Note that it may be possible for you to withdraw more than the RMD that is required by law, if your IRA and the terms of any employer-sponsored qualified plan in which you participate allow.

Do the math

The RMD is calculated based on the tax-deferred balances in your account on December 31 of the year prior to the year the RMD is due, and the factor table published by the IRS.  Generally, the Uniform Lifetime Table is used to calculate RMDs.  Say for example:

• You have $397,500 in tax-deferred accounts in your 401(k) on Dec. 31, 2023, and you turn 73 in 2024.
• Based on the Uniform Lifetime Table, IRS Publication 590-B, your life expectancy factor would be 26.5.
• $397,500 ÷ 26.5 = $15,000.
• The 2024 RMD for your 401(k) plan would be $15,000.
   

After the first RMD distribution year, you will need to take an RMD by Dec. 31 of each year. Each employer-sponsored qualified plan in which you participate must calculate your RMD separately and you must withdraw that amount from that plan. However, if you have more than one 403(b) tax-sheltered annuity account from the same plan sponsor, you may choose to total the RMDs and then take them from one or more of the tax-sheltered annuities.  A similar rule applies to IRAs, in that you may aggregate your RMD amounts for all your tax-deferred IRAs and withdraw the total from one IRA or a portion from each of your IRAs. Basically, you do not have to take a separate RMD from each IRA, but if you also participate in an employer-sponsored plan, you must take an RMD from that plan and an RMD from your IRAs.

Tips for RMD planning:

• Make a plan – Your RMD is the minimum you must take out. Create a withdrawal strategy to make sure you are taking out enough to meet your needs, but not so much that you’ll deplete your accounts too soon. Some retirement accounts offer distribution options that satisfy the RMD rules so that you don’t have to do the math. If you don’t take the RMD by the deadline, you may be subject to a 25% excise tax on the amount that should have been withdrawn.
• Consolidate multiple accounts – Since you need to calculate your RMD every year, consider consolidating your retirement accounts to simplify the process.
• If you are still working at your RMD age – your plan may permit rolling over your IRA accounts to the employer-sponsored plan where you are actively working before reaching your RMD age. This may result in you not having to take your RMD until you separate from service, depending on plan terms.
• Reinvest unneeded RMDs – If you don’t need the income to help cover your retirement expenses from your RMD, you could reinvest the distribution in one of your taxable accounts to cover future unanticipated expenses, like medical expenses, or invest it for other goals, such as funding your grandkid’s future education.
• If you don’t want to deal with RMDs – Roth IRAs and Roth accounts in qualified plans do not have RMD requirements for the original owner. However, RMDs will apply after the owner’s death with an exception for spouse beneficiaries of a Roth IRA.  Please also note that there may be tax consequences associated with the conversion of tax-deferred dollars to Roth, whether that is within a qualified plan or an IRA.
   

Work with a pro

With the over 200 pages of rules written in the Department of Treasury specifically for RMDs, the nuances can be easily tricky. If you fail to take one or miscalculate and take too little, you may owe a penalty on top of the federal income taxes you will pay on the withdrawal. The rules for beneficiaries are even more complex. It is recommended that you speak with your own legal counsel to understand the federal income tax consequences based upon your individual facts and circumstances. Voya cannot provide you with legal and/or tax advice.

Carefully consider the provisions of your current retirement plan and the new product for differences in cost, benefits, surrender charges or other important features before transferring assets. A Voya Financial Advisors financial professional** can help you review and compare all your options to help you determine what makes the most sense for you.