Required Minimum Distributions (RMDs)

Required Minimum Distributions (RMDs) are mandatory withdrawals that individuals must take
annually from their retirement accounts starting at a certain age. RMD rules are established by
the IRS to ensure that retirement funds are subject to taxation even if you don’t need the money
(Once again, yay, IRS).

RMDs apply to most retirement accounts, including traditional IRAs, SEP IRAs, SIMPLE IRAs,
and most employer-sponsored retirement plans like 401(k) and 403(b) accounts. However, Roth
IRAs are exempt from RMDs during the owner's lifetime but are subject to RMDs after the
owner's death if they are inherited by non-spousal beneficiaries.

Individuals must begin taking RMDs by April 1 of the year following the year they turn 73 (for
those born between 1951 and 1959) or 75 (for those born in 1960 or later). After this initial year,
RMDs must be taken out by December 31 of each year.

RMD amounts are calculated based on the account balance as of December 31 of the previous
year and the IRS life expectancy tables. This formula is: Account Balance/Distribution Period.
Let’s say your client’s retirement account balance is $800,000 and the distribution period is 21.2
years, the RMD would be approximately $37,735. RMDs are generally considered a part of
one’s taxable income. Withdrawals are subject to federal income tax and can be subject to state
income tax as well (the more the merrier). Failing to take the full RMD amount will result in a
huge penalty of 25% of the amount that was supposed to be withdrawn, which is certainly
something to keep in mind.

Understanding RMDs and their tax implications, penalties, and how they may affect the specific
accounts your client holds is critical for recognizing the most beneficial division. Do you want to
better understand RMDs and their use in a divorce case? There may be advantages to giving
these assets to the other spouse in a grey divorce. It’s better to be sure. Click the button below to
set up a complimentary consultation with a Certified Divorce Financial Analyst.