Individual retirement accounts (IRAs) were created to help you save your earned income and pursue your retirement goals. Over the years, the assets in your IRA are shielded from taxation, allowing you the opportunity to save more for retirement. However, the IRS won’t let tax deferral continue forever. Eventually, you will have to start taking annual minimum withdrawals called required minimum distributions (RMDs) from your traditional, SEP, and SIMPLE IRA (but not Roth IRA), as well as Qualified Plans. Failure to do so will result in a 50% penalty on top of ordinary income tax for the undistributed amount, so it’s important that you understand the rules of these withdrawals.

1. WHEN MUST I TAKE MY FIRST RMD?

Prior to 2020, RMDs had to be taken by December 31 each year starting at age 70½. In 2020 and after, the RMD start age was changed to 72 due to the enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. With that said, the required date of your first RMD can be delayed and taken by April 1 of the year after reaching age 70½ (prior to 2020) or age 72 (for 2020 and after). Note that only the first RMD may be delayed, and if delayed, you must take a second RMD in that same year by December 31.

2. HOW DO I CALCULATE AN RMD, AND WHAT IS THE “UNIFORM LIFETIME TABLE”?

To calculate RMDs, a simple formula must be used. Divide the previous year’s December 31 value of all your IRAs by a factor determined by your age found in the IRS Uniform Lifetime Table. This calculation will be done each year until the IRAs are depleted. The factor represents the joint life expectancy of a person who is age 70 or older and an assumed beneficiary who is 10 years younger. However, if yourspouse is the sole primary beneficiary and is more than 10 years younger than you, both you and your spouse’s actual ages may be used to determine your factor by referencing the IRS Joint Life andLast Survivor Expectancy Table. Please Note: The IRS has issued revised life expectancy tables that will take effect starting with 2022 RMD calculations.

3. WHAT AGE WILL I USE WHEN REFERENCING THE UNIFORM LIFETIME TABLE?

Use the age you will be as of December 31 of the year the RMD is intended. For example, if you are turning age 74 in December 2021, you would use the factor that coincides with age 74 for the 2021 RMD calculation.

4. WHAT IF I DON’T TAKE AN RMD OR TAKE THE WRONG AMOUNT?

RMDs are determined each year by using an IRS-prescribed formula, and failing to take an RMD or taking less than your RMD amount typically results in a 50% penalty on top of ordinary income tax for the difference between the required amount and the actual amount withdrawn.

5. MUST I TAKE AN RMD FROM EACH IRA I OWN?

If you have multiple IRA accounts, it is essential to include the value of all of your IRAs when calculating RMDs. However, rather than taking an RMD from each IRA, you can aggregate the RMDs and take the total from any of the IRAs you own (not including Roth or inherited IRAs).

6. MUST RMDs BE TAKEN FROM EMPLOYER-SPONSORED PLANS?

If you participate in or have a dormant employer-sponsored SEP or SIMPLE IRA and are age 72 or older, you must include the value of these IRA-based plans when calculating your RMD. However, you may take an RMD from the particular SEP or SIMPLE IRA, or aggregate the values and take the RMD from other IRAs that you own. If you participate in or have a dormant employer-sponsored qualified retirement plan (QRP), such as a 401(k), you cannot aggregate the values of these QRP RMDs with those of an IRA. QRP RMDs must typically be taken from that respective QRP account by December 31 each year starting at age 72; however, a QRP active participant may generally delay his or her first RMD until April 1 of the year after retirement if he or she is not a 5% or greater owner of the company sponsoring the plan. It’s important that you contact your employer’s human resources benefit specialist or plan administrator for proper guidance.

7. WILL STIFEL HELP ME CALCULATE MY RMD EACH YEAR?

Yes, your January monthly statement will contain updated RMD information for the year, and your Stifel Financial Advisor is available to explain the calculated RMD amount to you.

8. IS IT IMPORTANT TO NAME A BENEFICIARY FOR MY IRA?

When you name beneficiaries, you appoint who will inherit the assets in your IRA after your death. If you fail to name a beneficiary, generally the assets in your IRA will pass to your estate and will be subject to applicable probate laws and creditors, as well as limited distribution or RMD options. By naming beneficiaries, you ensure that your IRA assets will be available to the people you want to receive them.

9. WILL MY BENEFICIARIES HAVE TO TAKE RMDs?

If your spouse is your primary beneficiary and you pass away after you start taking RMDs, your spouse can continue to take RMDs or roll over the assets into his or her own IRA. A rollover could possibly reduce or stop RMDs that are currently being taken until your spouse turns age 72. At that time, RMDs must begin using the Uniform Lifetime Table.

For death occurring in 2019 or before, non-spouse beneficiaries of traditional, Roth, SEP, or SIMPLE IRAs will take RMDs based on their own single life expectancy, beginning December 31 in the year after your death. Their first RMD will be calculated using a factor from the IRS Single Life Expectancy Table. All subsequent years’ RMD factors will not be recalculated; rather, the original life expectancy factor will be reduced by one each year, and the prior year’s December 31 value will be used. For death occurring in 2020 or after, your non-spouse beneficiaries will generally be subject to a 10-year rule, meaning no RMDs will be required in any year, but the inherited IRA must be fully distributed by December 31 of the tenth anniversary of death.

10. DO BENEFICIARIES UNDER AGE 59½ HAVE TO PAY A 10% PENALTY ON RMDs?

RMDs for beneficiaries are generally subject to ordinary income tax, but are not subject to the 10% premature distribution penalty.

11. CAN I TAKE MORE THAN THE RMD, AND ARE THERE OTHER DISTRIBUTION OPTIONS AVAILABLE?

The RMD is the minimum amount that must be taken each year. You, your spouse, or non-spouse beneficiaries can always increase payments or take a total distribution at any point. Amounts in addition to the RMD are also generally subject to ordinary income tax.

12. CAN I CONVERT MY RMD?

No. RMD amounts are not eligible for Roth conversion. Conversion (or rollover) of an RMD is considered a prohibited transaction and is required to be removed as excess from the Roth IRA or account accepting the conversion or rollover.

HOW DO I CALCULATE A REQUIRED MINIMUM DISTRIBUTION (RMD)?

To calculate an RMD, follow these four simple steps:

* The same calculation and life expectancy factor can be used for Qualified Retirement Plan (QRP) RMDs; however, QRP RMDs cannot be taken from IRAs and vice versa. QRP RMDs (excluding 403(b)s) cannot be aggregated for RMD purposes and must be satisfied from each account or plan.

For example, if the balance of your aggregated IRAs on December 31, 2020, is $250,000, and you will turn 76 by December 31, 2021, you simply divide $250,000 by 22.0 to determine your 2021 RMD. Your RMD distribution is $11,363.64 for 2021.

For IRA owners in subsequent years, you must recalculate your RMD, so always determine your previous year’s December 31 aggregated IRA value and divide that total by the factor for your age on December 31 of the current year.

UNIFORM LIFETIME TABLE

SINGLE LIFE EXPECTANCY TABLE FOR INHERITED IRAS

If the original IRA owner passed away prior to 2020, non-spouse beneficiaries use this table to calculate RMDs based on their own life expectancy in the year following death of the IRA owner. The factor is reduced by one each year going forward.