Updated January 2023
Updated January 2023
A Required Minimum Distribution (RMD) is the amount that must be withdrawn from a qualified retirement account like the Thrift Savings Plan (TSP), a 401(k) or an Individual Retirement Account (IRA). These mandatory distributions typically begin at an age when most people are in retirement. That age has changed over time. But the rules surrounding the distributions themselves have remained relatively constant.
Intended Purpose of the RMD
Required Minimum Distributions came into existence with the creation of the IRA back in 1974.[i]
Individual Retirement Accounts come with specific tax benefits. Some people get a tax deduction for contributing to an IRA. And earnings in these accounts is exempt from federal income tax.
The purpose of the IRA has always been to save for retirement. It was never intended as an estate planning tool to pass assets on to future generations tax free. That was the whole point of the RMD.
Money that went into an IRA was expected to eventually come out. Required Minimum Distributions mandate withdrawals by the original account owner. Then, after that person dies, anything remaining in an IRA would be withdrawn by his or her heirs.
And all of these required withdrawals are considered taxable income – no matter who takes the distribution.
Early History of the RMD
The law that created RMDs set the timing for when they were to begin. Required Minimum Distributions had to be taken by December 31st in the year a person reached age 70½.
The original law also included a penalty if an RMD wasn’t taken. Distributions of less than the full required minimum would be taxed at 50 percent. So, for example, missing a $10,000 RMD meant a $5,000 tax liability. This remains the case today. Missed RMDs are taxed at 50 percent.
These provisions of the original law remained unchanged for almost 50 years. That changed in 1986.
The first change made RMDs mandatory for all qualified retirement plans. So, money in the TSP or a 401(k) was put on the same withdrawal timetable as IRAs.[ii]
The second change pushed the start date for taking RMDs to April 1st of the year after reaching the required age.[iii] This meant that someone who reached age 70½ one year could wait until the next year to take his or her first RMD.
The 1986 law also made clear that the first year distribution was the only one that got this treatment. A person delaying that first RMD would still have to take a second taxable withdrawal by the end of that same year.
Recent Changes to the RMD
Rules governing RMDs didn’t change again until 2019. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 moved the RMD age from 70½ to 72. The first year distribution delay remained in place.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 provided a single year’s reprieve on RMDs.
The Consolidated Appropriations Act of 2023, nicknamed the SECURE Act 2.0, made two changes to the beginning date for RMDs. The first pushed the start of RMDs to age to 73 starting on January 1, 2023. The second change pushes it out to age 75 beginning January 1, 2033.
The ability to delay the first RMD remains in place.
How to Calculate an RMD
Calculating an RMD is straightforward. It’s derived by dividing the previous year-end balance of all retirement accounts by a “distribution period” number provided by the IRS.[iv]
[i] Public Law 93-406, Employee Retirement Income Security Act of 1974, September 2, 1974, Pg 960.
[ii] Public Law 99-514, Tax Reform Act of 1986, October 22, 1986, Pg. 380.
[iii] Ibid, pg. 781.
[iv] See current revision, IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).
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