INTRODUCTION
The federal government has a seemingly insatiable appetite for our tax money. The Tax Code generally helps the IRS collect revenue as we earn money or liquidate assets at a profit.
With many assets we have a choice about when we will incur an income tax result. With others the news isn’t so good.
A number of tax incentives are built into the Code with regard to qualified plans, IRAs, and nonqualified annuities. That fact helps induce our clients to put money into such plans. However, there is no free lunch. The rules also create an end to the ability to defer income taxes for those products, in that eventually distributions are required.
Required minimum distributions (RMDs) may be forced to begin during the owner’s lifetime or after death, depending on the particular investment tool used and the circumstances facing a client or her beneficiaries.
In this issue, we will discuss the theoretical RMD choices available during the lifetime of the account owner. Understanding how RMDs work is critical to giving good financial advice.
LIFETIME RMDs
In general, RMDs must eventually be taken from qualified employer plans and IRAs if the account owner lives long enough. There are a few concepts important to understanding the timing and amounts of RMDs.
Required Beginning Date (RBD)
For IRAs the RBD is April 1 of the year following the calendar year when the participant has attained age
· 73 if born in 1959 or earlier or
· 75 if born in 1960 or later.
That is the deadline for taking the first RMD.
For non-IRA pension accounts the RBD is deferred to April 1 of the year following the taxpayer’s retirement if:
1. the plan is sponsored by the employer for which the participant is employed, and
2. the participant is not a 5 percent or more owner of the employing company.
RMDs from the pension account must start by the relevant RBD.
SEP IRAs and SIMPLE IRAs are treated as IRAs, rather than pension plans, for the purpose of determining a participant’s RBD. That means RMDs must begin by April 1 following the calendar year in which the taxpayer turns 73 or 75, whether still working or not.
Subsequent RMDs, after the first one taken from a particular account, are due on December 31. If the first RMD is taken at the last minute—April 1, 2027, for example—the second RMD will be due no later than December 31, 2027. That means waiting until the last minute may require the taxpayer to take, and pay tax on, two RMDs in the same calendar year.
Roth IRAs and Designated Roth Accounts
Minimum distributions are NOT required from personal Roth IRAs while the original account owner is alive.
Where Section 401K plans, Section 403b plans, or governmental Section 457b plans offer a designated Roth account option, funds in those plans had in the past been subject to normal qualified-plan minimum-distribution rules while the account owner was alive. However, since 2024, lifetime RMDs are no longer required from designated Roth accounts.
The Tables Used to Calculate RMDs
In this issue we will make reference to the Uniform Lifetime Table and Joint Life and Last Survivor Expectancy Table used for minimum distribution calculations. For your reference a copy of the Uniform Lifetime table, taken from IRS Publication 590-B, can be found at the end of this newsletter.
The factors from the tables are used in conjunction with the end of the prior year’s account balance to calculate the RMD.
A Word About RMDs
In discussing RMDs, the focus is on the smallest amount the account owner (or beneficiary) can receive. However, the account owner can usually opt to take bigger distributions if they are needed. In most cases bigger distributions simply mean a bigger current income tax result for the owner or beneficiary.
A Basic Example
Here’s a quick example of how to calculate a lifetime RMD.
Laura is single and was born on October 1, 1953. She reached age 73 on October 1, 2026. Her required beginning date is April 1, 2027. Her factor from the Uniform Lifetime Table for 2026 is 26.5 (based on her 73rd birthday in that calendar year). If as of December 31, 2025, her IRA account balance was $26,500, then her required minimum distribution for 2026 is $1,000 ($26,500 ÷ 26.5). That amount was due to be distributed to her no later than April 1, 2027.
Her second RMD for calendar year 2027 is due by December 31, 2027. If her IRA account balance was $26,200 on December 31, 2026, then her required minimum distribution for 2027 is $1,027 ($26,200 ÷ 25.5). Note that she would use the factor for age 74 (her 2027 birthday) from the Uniform Lifetime Table.
Another Example Where Spouse Beneficiary Is Much Younger
The IRS allows a taxpayer who
1. names his spouse the sole beneficiary of the account and
2. whose spouse is more than 10 years younger than the taxpayer
to use the Joint Life and Last Survivor Expectancy table to calculate RMDs. The table gives more generous life expectancy numbers for the taxpayer, leading to lower RMDs.
Here’s an example:
Joe, born October 1, 1953, reached 73 in 2026. His wife (his sole beneficiary) turned 56 in September 2026. Joe must begin receiving minimum distributions by April 1, 2027. Joe’s IRA account balance as of December 31, 2026, was $31,700. Because Joe’s wife is more than 10 years younger than Joe and is the sole beneficiary of his IRA, Joe uses Table II in Appendix B of Publication 590-B to calculate RMDs. Based on their ages at year-end (December 31, 2026), the joint life expectancy for Joe (age 73) and his wife (age 56) is 31.7 years. The required minimum distribution for 2026, Joe’s first distribution year, is $1,000 ($31,700 ÷ 31.7). This amount was due to be distributed to Joe on April 1, 2027.
Carrier vs. Taxpayer Responsibility
The financial custodian of the IRA is obligated to send an annual letter to the account owner by January 31. If an RMD is due from the account, the institution is responsible for calculating the amount and including it in the letter.
Having said that, the ultimate responsibility for calculating and taking the proper RMD amount falls on the taxpayer. While the financial institution bears some responsibility for alerting the owner of any RMD obligation, the penalties for failing to do so are indirect and hypothetical. The penalties for a taxpayer’s failure are direct and potentially substantial.
Failure to Take an RMD
In the past, a person who failed to take a required minimum distribution risked a 50 percent penalty tax. Section 302 of the SECURE Act 2.0 changed the missed RMD penalty from 50 percent to 25 percent of the amount not taken beginning in tax year 2023. Furthermore, the penalty is further reduced from 25 percent to 10 percent if the taxpayer fixes the failure by taking a corrective distribution prior to the earlier of
· when the IRS catches them or
· before the end of the second calendar year after the missed RMD.
A taxpayer who has not taken an RMD by the deadline is expected to file IRS Form 5329 with the tax return for the year.
SPECIAL RULES
Many special rules may affect a client’s RMD planning.
RMDs Cannot Be Converted or Rolled Over
Clients often want to know whether minimum distributions can be rolled over or converted to a Roth IRA. The answer is no. RMDs are not eligible for rollover. Furthermore, only IRA distributions that are eligible for rollover can be converted to a Roth IRA.
A taxpayer who has reached age 73 may convert traditional IRA or other qualified plan balances that are not part of an RMD to a Roth IRA.
RMDs Must Be the First Distribution
The final regulations for the SECURE Act made clear that the first distribution for a year in which an RMD is due must go toward satisfying the taxpayer’s RMD obligation for that year.
Determination of whether a distribution is a required minimum distribution. . . .
[I]f a minimum distribution is required for a calendar year, then the amounts distributed during that calendar year are treated as required minimum distributions . . . to the extent that the total minimum distribution required . . . for the calendar year has not been satisfied (and accordingly, those amounts are not eligible rollover distributions).
https://www.federalregister.gov/documents/2024/07/19/2024-14542/required-minimum-distributions
If a taxpayer plans to roll over a qualified account balance in a year of an RMD distribution, the RMD must be taken first. If it is not distributed properly, the taxpayer will have made an excess contribution into the receiving account—because an amount not eligible for rollover was rolled into the new account.
A taxpayer who has made an excess contribution can cure it by withdrawing the excess—plus any earnings associated with it—on or before the due date for the year’s income tax return (including extensions). If she fails to do that, she will be liable for a 6 percent tax on an excess IRA contribution. The penalty tax is applied each year for which the excess remains in the account.
Account Cross-Overs Are Not Allowed
The IRS does not permit distributions from one type of account to count toward satisfying the RMD obligation for another.
Q5. Can an account owner just take a RMD from one account instead of separately from each account?
An IRA owner must calculate the RMD separately for each IRA they own but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract they own but can take the total amount from one or more of the 403(b) contracts.
However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans, must be taken separately from each of those plan accounts.
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs
Qualified Charitable Distributions (QCDs)
The federal government has created a tax-relief measure that had been in effect since 2006. The provision is called the qualified charitable distribution (QCD).
Prior to 2006, if a person wanted to make a charitable distribution using IRA money, he’d have to take a taxable distribution from the IRA and then write a check to the charity. Many taxpayers who did that were unable to claim a full charitable deduction for the money donated because they didn’t itemize their deductions or because they otherwise failed to qualify for the deduction.
With the QCD technique, taxpayers who are older than 70 ½ may donate money to charity directly from their IRA account. The distributions to charity will be tax-free. Taxpayers are allowed to donate up to $111,000 (2026) per year from their IRAs. Since the distribution will not be included in taxable income, individuals will not be able to claim a tax deduction for the charitable contribution.
One other positive result of implementing the strategy is that amounts sent directly to charity also qualify for meeting minimum distribution requirements for those 73 or older.
Those who are older than 70 ½ and have an inherited IRA are also able to take advantage of the QCD technique.
Clients ought seriously to consider using IRA money instead of just writing a check if they are
· older than 70 ½,
· already supporting a charity with financial contributions, and
· facing the prospect of taking otherwise unneeded distributions from an IRA.
Income Rider
The presence of an income rider in an annuity-based IRA may present a challenge to calculating required minimum distributions (RMDs) for those older than 73.
Treasury Regulation Section 1.401(a)(9)-6, Q&A-12, provides that for purposes of applying the required minimum distribution rules, the contract’s cash value plus the actuarial present value (APV) of any additional benefits (such as survivor benefits in excess of the dollar amount credited to the employee or beneficiary) must be taken into account. In general, the year-end value of the IRA annuity is used to calculate the following year’s RMD for the taxpayer.
Income riders can have significant value—especially for an older client. The extra value must be considered to properly calculate the RMD amount. Unfortunately, the IRS has not given us clear method for how to value an income rider for RMD purposes. As a practical matter, that means the client and the client’s tax advisors must rely on the company’s actuary to properly calculate the contract’s fair market value and its associated RMD.
Single Premium Immediate Annuity (SPIA)
Say you have a client who is interested in annuitizing his IRA account and wants to have the annuitization payment count for an RMD not only for the account being annuitized but for one or more companion IRA accounts as well. Is that possible?
Prior to the enactment of the SECURE Act 2.0, the consensus was that a SPIA could only satisfy the RMD obligation for the account that had been annuitized. Now, however, it is possible for the insurance company to calculate an annual fair market value for the IRA that has been converted to an income stream. If the annual income payments are greater than those needed to satisfy the RMD—based on the SPIA’s fair market value—then the excess income is available to satisfy the RMD obligation for other IRAs the taxpayer might own.
CONCLUSION
The rules with regard to RMDs have nuances that can confuse even experienced financial professionals. However, helping clients make plans for taking RMDs and managing the tax results associated with them are part of the advisor’s territory.