By Matt Crisafulli, CFP, EA, August 24, 2020

The passing of the SECURE Act in December 2019 brought a lot of attention to “Required Minimum Distributions”, but what are required minimum distributions and who do they apply to?

What is a Required Minimum Distribution (RMD)?

A Required Minimum Distribution is just as it sounds - it is the minimum amount that retirement account owners are required to take from their account(s) each year to satisfy IRS rules. You can withdraw more than the minimum amount from the account, if desired, but the RMD is the minimum amount that must be withdrawn each year. 

How is the RMD Amount Calculated?

The required minimum distribution amount is different for each person, each account, and each year. It is determined using the prior year’s balance as of 12/31 and an IRS factor as determined by the IRS Single Life Table. For example, if a 75 year old IRA account owner had exactly $10,000 in their account at year end, the RMD amount would be determined by dividing the year end balance of $10,000 by the IRS factor for a 75 year old person, which is 13.4. In this example, the RMD for the year would be $746.27, which is calculated $10,000/13.4 = $746.27.

Which Account Types are Subject To RMDs?

There are many different types of retirement accounts and virtually all of them will require distributions at some point. You will generally have to begin taking withdrawals from IRAs, SEP IRAs, SIMPLE IRAs, or other retirement plan accounts when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020), however, Roth IRAs do not require withdrawals until after the death of the original account owner. Those who inherit Roth IRAs upon the passing of the first owner are subject to required minimum distributions. There are different rules for inherited retirement accounts, but distributions are required from these accounts as well. 

Are Required Minimum Distributions Taxable?

Your RMD withdrawals will be included in your taxable income for the year in which they are withdrawn.  An exception applies for any part that was previously taxed (called “basis”) or that can be received tax-free, such as qualified distributions from designated Roth accounts (such as Roth IRAs, Roth 401ks, etc.). 

How to avoid taxes on Required Minimum Distributions (RMDs)

To avoid paying taxes on RMDs, consider donating your RMDs to a qualified charity. With a Qualified Charitable Distribution (QCD), you can satisfy the RMD requirement, lower your taxes, and still help a charity.

Looking for an independent fiduciary financial advisor who can advise you on investments, retirement, real estate, alternative assets, and taxes? Contact ACap Advisors & Accountants to schedule a free initial consultation. Our clients include individuals, small businesses, entrepreneurs, and anyone serious about saving and investing for their future.

Matt Crisafulli, CFP, EA is a partner at ACap Advisors & Accountants, LLC in Los Angeles, CA.