What is a required minimum distribution (“RMD”)?
An RMD is the minimum amount that the IRS requires you to withdraw from your Traditional, SEP or SIMPLE IRA (“IRA”) each year once you reach a certain age. The exact amount changes from year-to-year based on several factors (see below).
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Are Self-Directed IRAs Subject to RMDs?
RMDs apply to traditional, SEP, and SIMPLE IRAs, whether they are self-directed or not. Roth IRAs (self-directed or otherwise) do not require RMDs until the death of the owner.
When Do I Need to Start Taking RMDs From My Self-Directed IRA?
RMD rules are shifting in light of recent retirement legislation.
The SECURE 2.0 Act of 2022 changed certain RMD rules by raising the age at which investors must take their first RMD from 72 to 73. The SECURE 2.0 Act of 2022 also states that the age an investor must take their first RMD will change again in 2033 from age 73 to age 75. Traditional, SEP, and SIMPLE IRA owners who turn 72 in 2023 do not have to take an RMD in 2023, and the Required Beginning Date (“RBD”) to take your first RMD will now be April 1 of the year following the year you turn age 73.
If you choose to delay your first RMD to April 1, 2025, you will be required to take two RMDs in one tax year: Your first by April 1, 2025, which satisfies your required withdrawal for 2024, and your second by December 31, 2025, which satisfies your RMD for 2025.
Additionally, prior to enactment of the SECURE 2.0 Act of 2022, investors who failed to take a RMD were subject to a penalty equal to 50% of the required withdrawal amount. The SECURE 2.0 Act of 2022 reduces that penalty to 25%, and potentially as low as 10% if certain circumstances apply. We encourage you to speak with your tax advisor about your particular situation.
How Do I Calculate My RMD?
Your RMD is based on your account balance from December 31st of the year that precedes the year you’re taking the distribution. That number is then divided by the amount indicated in Appendix B of the IRS Publication 590-B, from the “Joint Life and Last Survivor Expectancy Table” (if your spouse is the sole beneficiary and is more than 10 years younger than you) or the “Uniform Lifetime Table” (for everyone else).
What if I Have IRAs at Multiple Firms?
You must calculate the RMD for each IRA account that you own, but you can withdraw the total amount from any of your IRA accounts as long as you take the total amount required.
Can Pacific Premier Trust Calculate and Distribute My RMD for Me?
Pacific Premier Trust is happy to help you calculate the RMD for the accounts you hold with us. However, since we can’t see the accounts our clients hold with other institutions, it’s ultimately your responsibility to determine the total RMD amount for all of your accounts. Pacific Premier Trust can provide your annual RMD amount upon your request. Additionally, we provide your annual RMD information in your quarterly statement.
How Are RMDs Treated for Tax Purposes?
For most IRAs, distributions are treated as taxable income. For Roth IRAs, distributions are generally tax-free, however, please keep in mind that Roth IRAs do not have a RMD requirement while the IRA owner is living.
What Happens if I Don’t Take My RMD?
If you fail to take your RMD or if you take less than the minimum amount, you may be subject to a 25% excise tax on the amount not distributed as required. For example, if your RMD is $5,000 and you only take out $2,000, you may be required to pay excise tax in the amount of $750 — or 25% of the amount that wasn’t distributed. We encourage you to speak with your tax advisor about your particular situation.
For guidance on RMDs, it’s always best to work with a financial advisor or tax advisor to ensure you are meeting your RMD requirements while also staying on course to achieve your retirement goals.
What if I Don’t Have Enough Cash in My Self-Directed IRA to Cover the RMD?
If you don’t have enough cash to cover the RMD in one IRA, you generally have three options to choose from:
- Take the total RMD amount from your other IRA accounts and leave your self-directed IRA intact.
- Liquidate assets in order to make the distribution (works best with exchange-traded assets like stocks, bonds, ETFs, and mutual funds).
- You may be able to take the distribution in-kind (i.e., partial assignment/transfer of an IRA asset).
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