I needed to write this now because the end of the year is a critical deadline for Required Minimum Distributions (RMDs). What’s more, there have been so many changes to the tax code over the past five years that there isn’t a financial planner who can keep things straight without a cheat sheet. To top it off, there’s a best practice you should know about, especially if you manage your own IRA/401(k)/403(b) investment accounts.

Apologies to those who would prefer a story. This week I only have cold, hard, financial facts. Let’s start with the basics:

Required Minimum Distribution (RMD): A mandatory transfer out of your traditional IRAs and 401(k)s/403(b)s, as set by an IRS calculation, based on your age. This may also refer to a mandatory transfer out of traditional and Roth IRAs and 401(k)/403(b)s that you inherit.

Required Beginning Date (RBD): The age on which you must take your first RMD. The deadline is April 1 in the year after you reach your RBD age. If you were born before 1951, your RBD age is 72. If you were born later, but before 1960, your RBD age is 73. If you were born in 1960 or later, your RBD age is 75.

The RBD has changed multiple times in the last decade. As a result, lots of folks are confused. But currently, the date is age 73 (since everyone who was born before 1951 has already reached their RBD age). And it remains 73 until we get to my cohort, the #Peak65 folks. By the way, there’s nothing keeping you from starting your distributions sooner. This is simply the latest you must begin your distributions.

Three-month grace period for your first RMD: You have until April 1 of the year after your RBD age to begin your first RMD. After that, all RMDs must be completed by December 31. You don’t have to take your distribution all at once. But you have to complete it by year end.

Still-working exception to the rules: If you remain employed by the same employer that sponsors your plan, you may forego RMDs until April 1 of the year after you retire. However, if you are not currently working at the same company, the exception does not apply. Theoretically, if you had a traditional IRA and were still working at a company that sponsored a 401(k), you would be required to take an RMD from your IRA but not your 401(k).

Inherited IRAs, Inherited Employer Sponsored Accounts, and Inherited Roth IRAs: These all require RMDs. In general, unless you fall into the category of Eligible Designated Beneficiary (EDB), you must empty an inherited account in 10 years. Note that, while your own Roth IRA has no RMDs and no taxes, your inherited Roth IRA does have RMDs, even though the distribution is tax free if the account had been open for at least 5 years.

Eligible Designated Beneficiaries (EDBs): These people are exceptions to the inherited IRA distribution rules. They do NOT have to empty their account(s) in 10 years. They include:

• A spouse, who can take RMDs at their own RBD age or the RBD age of the deceased, whichever is to their advantage.

• A minor child, who has until age 18 to start the 10-year distribution process.

• Disabled and chronically ill individuals, who may distribute funds according to their own RBD ages.

• Beneficiaries who are not more than 10 years younger than the deceased IRA owner, who may distribute funds according to their own RBD ages.

All-of-a-Kind Account Aggregation: You may aggregate your distributions based on type of retirement account by adding up all account balances of each type. For example, if you have more than one IRA, you may add up the value of all IRAs and take the entire distribution from only one. You are permitted to add up all of your 403(b)s and do the same. Note that 401(k)s are done individually. So that might be a good reason to roll them into an IRA.  

Taxes: With the exception of inherited Roth IRAs that have been open for more than 5 years, the RMD is taxable as income. That’s because it was deposited into a tax-deferred account that grew tax free. So, it’s important when calculating your needs, that you also account for the tax you will pay on this income. You’ll want to add it to other sources of income (like your taxable Social Security, pension, etc.) to ensure you will set it aside (i.e., NOT spend it) for taxes. Most people stipulate, on the RMD form, how much Federal and State tax should be withheld to ensure there are no surprises.

Penalties: You may ask, “Why do I care so much about RMDs?” I don’t want anyone to receive a penalty for failing to take theirs because the penalty is hefty. It can range from 10% to 25% depending on how soon you correct your error.

So, if you inherited an IRA last year, you should remember to take your RMD by December 31, 2024*. If you reached your RBD age last year, you should have taken your 2023 distribution by April 1, 2024. You still need to take your 2024 distribution by December 31, 2024. And last, if you reach your RBD age in 2024, you will need to take your first RMD by April 1, 2025.

Calculation: There are three tables you will use to calculate your RMD. As I said above, you can always take more money, assuming you’re not at risk of running out. Use the table that corresponds to your age and the age of your spouse, if you are married.

• Uniform Lifetime Table: for all unmarried IRA holders and married IRA holders whose spouses are not more than 10 years younger and/or are not the sole beneficiaries of the account.

• Table 1 (Single Life Expectancy):  for non-spouse beneficiaries.

• Table 2 (Joint Life and Last Survivor Expectancy): for married IRA holders whose spouses are more than 10 years younger and are the sole beneficiaries of the account.

To illustrate, I’m going to borrow a 2024 Set of Tables from Ed Slott**. These tables will be updated for 2025.

To begin the calculation, use the value of the account on December 31 of the year prior to RBD age. To continue, use the value of the account each December 31 thereafter. Follow the table and divide your balance by the corresponding factor. The result is your RMD calculation.

1099-R: In January, you will receive a 1099-R form from your account platform to reflect the distribution for your tax filing.

Now, let’s talk about best practice:

You can take your RMD in whole or in parts. But remember that your money is currently invested in the stock market. So, in order to retrieve it, you first need to sell your investments and render them liquid. We call this “raising cash.”

So long as it’s before the RMD deadline, it doesn’t matter when you transfer your RMD from your retirement account to your non-retirement account (unless your initial RMD matters to your reported income). But it absolutely does matter when you raise the cash. You want to raise cash when the market is up; not when the market is down. One best practice is to raise cash for RMDs well in advance of needing it, sometimes up to 18 months if you are being conservative with your money. You do this in steps:

• First, sell your market-based assets and place the money in an interest-bearing instrument, like a short-term bond, when you are 2 years to 18 months away from your distribution.

• Then, transfer that money into a money market mutual fund (MMMF) or sweep fund when you need it to be liquid and available.

NOTE: All of this occurs within the same retirement brokerage account. It is NOT yet a distribution.

While you have made trades, no distribution has occurred until the money leaves the account. This gives you the ability to take advantage of selling when the market is high and waiting out a correction if necessary. The goal is to avoid taking your RMD in a down market.

Well, guess what?  As I write this, the S&P 500 Index is near its all-time high. If you need to take an RMD or any kind of distribution in the next year, this is a great time to sell the investments and raise the cash. You don’t have to distribute it from the account until just before your deadline. But don’t be greedy by trying to time the market’s next high. After all, nobody knows what the market will do. And you don’t want an unpleasant surprise.

And that’s the real reason I wanted to write this post now—so you can take advantage of good market timing and prepare your RMD. This may already be happening behind the scenes with your financial advisor. (It can’t hurt to ask.) But if you manage your own retirement assets, raising cash at intervals before you need it is a trick you should know. #WeRescueOurselves

If you want to learn more or have questions for me about your finances, become a subscription member of Financial & Longevity Planning in the Madrina Molly™ Community. If you’d like the company of other Women of a Certain Age(ncy), join our free Shared Wisdom discussions or take individual courses.

* The initial RMD from an inherited IRA account may also include an RMD for the deceased, if they had not already taken an RMD in the year of death.

** Ed Slott is an IRA guru and popular resource for advisors and retirees. He and his team are specialists in all things IRAs. www.irahelp.com

Copyright © Madrina Molly, LLC 2024. All rights reserved.

The information contained herein and shared by Madrina Molly™ constitutes financial education and not investment or financial advice.

Sherry Finkel Murphy, CFP®, RICP®, ChFC®, is the Founder and CEO of Madrina Molly, LLC. 

#RequiredMinimumDistribution #InheritedIRA 

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