Taxation of required minimum distributions
Every good thing must come to an end … even tax deferral.
POINTS TO KNOW
The CARES Act provides a temporary waiver of RMDs for 2020 including any delayed 2019 RMD (if the 2019 RMD wasn't taken before January 1, 2020). If you would have had an RMD obligation for 2020, you do not have to take your RMD for 2020 (or delayed 2019 RMD) if you don't want to.
If you have already taken a withdrawal in 2020 that would have been an RMD (had RMDs not been waived), you may be eligible to roll the money over. All or a portion of a distribution already taken in 2020 (that would have represented an RMD, had RMDs not been waived) may be rolled over back into an IRA by August 31, 2020. Rollovers of RMDs taken in 2020 don't count toward the IRA one-rollover-per-365-days rule.
New guidance permits RMDs taken in 2020 from inherited IRAs to be rolled back into the inherited IRA the distribution came from, by August 31, 2020.
For more information about the rollover rules, go to irs.gov or consult a tax advisor.
- Once you hit age 72 (age 70½ if you attained age 70½ before 2020), the IRS requires you to start withdrawing from—and paying taxes on—most types of tax-advantaged retirement accounts.
- You may also be required to take RMDs from retirement accounts you inherit. In most cases, RMDs are treated as ordinary income for tax purposes.
What's a required minimum distribution?
But you can't continue deferring these taxes forever. When you reach age 72 (age 70½ if you attained age 70½ before 2020), you'll be required to withdraw at least a certain amount (called your "required minimum distribution," or RMD) from your accounts every year and pay income taxes on these withdrawals.
Anyone who inherits an IRA may also be required to take RMDs. In general, nonspouse beneficiaries that inherit an IRA from someone that passed away in 2020 or later may be required to withdraw the entire account balance within 10 years. Spousal beneficiaries and certain eligible nonspouse beneficiaries may be permitted to take RMDs over their life expectancy.
Good to know!
What's the deadline—and what if I miss it?
For most people, the annual deadline for taking an RMD is December 31. But if it's your first RMD, you can wait until April 1 of the year following the year you reach age 72 (age 70½ if you attained age 70½ before 2020).
Just keep in mind that deferring your first RMD means you'll have to take 2 RMDs that year (the first by April 1 and the second by December 31).
If you don't take your RMD by the deadline or if you take less than you're supposed to, you could be subject to a 50% penalty on the shortfall.
For example, if your RMD is $50,000 and you only take $30,000, you'd be short $20,000 and could owe a penalty of $10,000.
How is my RMD calculated?
Your RMD is determined by dividing your prior year-end retirement account balance by your life expectancy factor (published by the IRS).
Many companies, including Vanguard, will calculate your RMD for you. You can also use our tool to estimate your RMD.
If you have multiple accounts
You'll have to calculate your RMD for each IRA and employer-sponsored plan separately.
When you take RMDs from your IRAs, you can withdraw them from any account you choose.
For example, if you have 2 IRAs and 1 has an RMD of $1,000 while the other has an RMD of $2,000, you can take the entire $3,000 from 1 of your IRAs or you can take a certain amount from each—it's up to you.
Employer plans work differently. You have to take each RMD amount from the specific account it was calculated for.
How are RMDs taxed?
If all your IRA contributions were tax-deductible when you made them, the full amount of the RMD will be treated as ordinary income for the year in which you take it.
If you also made nondeductible contributions to your IRAs, some of the amount won't be subject to income taxes. You can use IRS Form 8606 to calculate and report the amount that's not taxable.
Can I donate my RMD to charity and avoid the taxes?
Yes. A qualified charitable distribution (QCD) is not subject to ordinary federal income taxes – the amount is simply excluded from your taxable income. In general, QCDs must be reduced by deductible IRA contributions made for the year you reach age 70½ or later. If you've made deductible IRA contributions for the year you turn 70½ or later, consult a qualified tax advisor prior to taking a QCD to determine the amount by which your QCD must be reduced.
Making QCDs can be a great strategy for anyone who's charitably minded and doesn't need his or her full RMD. In many cases, it's more advantageous than taking the withdrawal and then donating it, because cash donations have deductibility limits.
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How to lower your taxes
The yearly, monthly, or weekly amounts you save in your account.
A type of account created by the IRS that offers tax benefits when you use it to save for retirement.
A type of IRA that allows you to make after-tax contributions (so you don't get an immediate tax deduction) and then withdraw money in retirement tax-free as long as you meet the requirements.
The investment returns you accumulate on the savings in your account.
Contributions you can subtract from your income on your tax return, resulting in a lower tax bill.