If you have an existing retirement account, you’ll likely need to take the required minimum distributions (RMDs) at some point. Here, we cover all you need to know about RMDs, from rules and calculations to reporting. We also explore common mistakes to avoid and special considerations for self-directed individual retirement accounts (SDIRAs).
What Are the Rules for RMDs?
RMDs are the amount you must withdraw from your retirement account each year after reaching age 73. RMDs apply to most but not all types of retirement accounts, including IRAs, 401(k)s and 403(b)s. Account owners do not have RMDs for Roth accounts, but beneficiaries after the owner’s death do have RMDs. Additionally, distributions aren’t required on employer-sponsored accounts owned by employees who are still working as long as they own no more than 5% of the company.
The first year after turning 73, you must take two RMDs. The first is due in April based on the account balance as of the end of the year before you turned 73, and the second by the end of the year after you turned 73 based on the previous year’s account balance. For example, if you turn 73 in 2025, your two distributions would be:
- Due by April 1, 2026, based on the account balance as of December 31, 2024.
- Due by December 31, 2026, based on the account balance as of December 31, 2025.
Note that the rules changed in December 2024 under the SECURE Act 2.0. The act will increase the age for RMDs to 75 in 2033. It’s essential to stay up to date on any changes since not taking RMDs or not withdrawing enough can lead to fines, penalties and additional taxes.
How Do I Calculate My RMD Amount?
Calculating your RMD is theoretically simple — divide the account balance at the end of the previous year by the life expectancy factor from the applicable IRS table. The IRS publishes many different tables for various situations, such as the type of account, whether you are the account owner or beneficiary, your marital status and the difference between your age and your spouse’s age if your spouse is the sole beneficiary.
Because knowing which table to use can be complicated, many people use an online RMD calculator. However, these calculators don’t always take all the relevant factors into account. Visiting your financial advisor for assistance is often best.
Where Do I Report RMDs on My Taxes?
You can expect a 1099-R for your RMDs. When you make a withdrawal over $10, you should receive a 1099-R from your plan issuer by January 1, reporting the distribution amount from the previous calendar year.
Then, you report your required minimum distributions on your tax return as ordinary income at the standard income tax rate. Depending on your other income, these distributions may increase your taxable income enough to push you into a higher tax bracket. For federal taxes, most people report RMDs on Form 1040. You must report the total amount distributed and the taxable amount — it may not be the same if you received distributions from Roth IRAs. You may also have to pay state taxes, but the rules vary by state.
What Is the Biggest RMD Mistake?
The biggest mistake people make is missing the deadline for withdrawals. You must withdraw the full amount by the end of the calendar year.
Withdrawing less than the required minimum is also a common mistake. Both errors can have significant penalties. The current excise tax is 25% for missed RMDs or distributions of less than the full required amount.
If you correct the mistake promptly, the IRS may reduce this penalty to 10% or waive it entirely if you can show that the difference was due to reasonable error. To correct the shortfall, file Form 5329.
Additionally, if you have multiple accounts with RMDs, you must calculate each one separately. You cannot combine account balances and divide the cumulative amount by your life expectancy factor. However, you can take the total distribution from any of the accounts.
If you withdraw more than the required minimum, you cannot apply the amount over the minimum to the next year.
Special Considerations for Self-Directed IRAs
SDIRAs typically hold nontraditional assets — such as gold, cryptocurrency or real estate — that can be more difficult to value. Because RMDs are calculated on the account’s value, proper valuation is essential. Inaccurate or low valuations could cause you to under-calculate RMD, leading to penalties and fines.
If you have enough cash or liquid assets such as stocks and bonds, you can take a cash distribution. You may need to liquidate other assets or take an in-kind distribution.
For example, if the only asset in your SDIRA is a rental property, you might not have the cash to make the RMD. In that case, the SDIRA instead distributes a percentage of the ownership to you personally instead of being owned by the SDIRA.
You need a new deed showing the change in ownership, and the change could still have tax implications, such as potential capital gains taxes. Note that the property is still subject to prohibited transactions and disqualified person rules as long as the SDIRA owns any portion, no matter how small.
Keeping a cash reserve or more liquid funds in your SDIRA might be a good idea. Alternatively, since you can take the distribution from any account with RMDs, you could ensure at least one of your accounts has funds to cover your total RMDs. It’s best to work with your financial advisor to create a strategy that meets your needs.
Trust Your SDIRAs to Accuplan
RMDs can be tricky if you’re unsure of the process since there are tax consequences for not getting it right. They can be extra complicated for SDIRAs. Savvy investors understand the importance of handling RMDs carefully to avoid penalties and additional taxes. At Acuplan, our team of experts is ready to assist, providing guidance and answering questions you have about SDIRAs and RMDs to help you navigate the process smoothly.
Our intuitive platform is built for individual investors and businesses alike. We want to help you do more with your retirement portfolio to set your future up for success. We have years of experience in the industry, and we specialize in self-directed IRAs.
Contact Accuplan Benefits Services for expert guidance on managing RMDs and SDIRAs today!
Our information shouldn’t be relied upon for investment advice but simply for information and educational purposes only. It is not intended to provide, nor should it be relied upon for accounting, legal, tax or investment advice.
