Understand your options, the rules to follow and penalties to avoid when taking required minimum distributions.
If you have a 401(k) or traditional IRA, you’ll need to take required minimum distributions (RMDs) each year once you meet a certain age – or face harsh penalties. But not all RMD rules are easy to understand, and there have been multiple rule changes in the past few years. That’s why it’s important to get familiar with the rules and speak with your J.P. Morgan team each year. Besides helping you avoid pitfalls, we can also explore strategies together that may increase the value of your retirement accounts.
RMD rules to know: Who, when and how much
If you own a retirement account and have reached age 73, generally you will need to take an annual RMD each year before December 31.1, 2
First year exception: You can delay taking your first RMD until April 1 of the year following the year you turn 73. However, if you delay your first RMD, you will end up taking two in that next year.
If you don’t take your RMDs on time, you face paying tax penalties of up to 25% of the outstanding RMD you’re due. This was a change with SECURE Act 2.0 passed in December 2022, as the prior penalty was 50%. To be clear, although the penalty is lower (in some cases it can be as “low” as 10%), it is never advisable to miss an RMD.
Note that you are responsible for calculating your RMDs for the year. However, in many cases, you can request that your IRA or 401(k) provider automatically calculate the RMD for accounts they hold. Either way, the formula below will give you an idea of how much to expect each year.
This chart explains how to calculate your RMDs. Divide your account balance on December 31 of the previous year by the “distribution period” number from IRS tables. Worksheets are available at www.irs.gov. Then you will get that year’s required minimum distribution.
Understanding your options
While the rules for retirement accounts may be complicated, you have options for RMDs. Depending on your situation or needs, you can make decisions that can significantly alter how much you or your beneficiaries receive. Here are some options that may be available to you:
- If you don’t need or want the income: You can avoid adding some of the RMD amount to your taxable income for the year by giving it to charity. To do this, you can have up to $108,000 distributed directly to a qualified charity as a Qualified Charitable Distribution (QCD), and that amount will go toward satisfying your RMD. You will not receive a charitable tax deduction for the amount, since you did not have to report the distribution as income; however, you may choose the charity. Note that donor-advised funds or private foundations are not eligible recipients for QCDs.
- If you have multiple traditional IRAs and want to simplify the accounting: You can calculate the RMD for each IRA but take all your RMDs from just one account. Different rules apply to other types of retirement accounts, such as 401(k)s.
- If you need or want more income sooner rather than later: Taking only the RMD and doing so at the end of the year is usually the most tax-efficient choice. However, as the IRA owner, you can always withdraw more if it makes sense to do so based on your individual circumstances.
- If you are worried about potential future tax law changes or want to explore how you might maximize your retirement accounts for your heirs: Consider converting your traditional IRA into a Roth IRA This would mean paying U.S. and state income taxes in the year of the conversion, but it would exempt any future growth from income taxes and RMDs. There are several different factors to determine if a conversion might make sense—your age, liquidity outside of the IRA, future income tax rates and IRA beneficiaries. Your J.P. Morgan team and tax advisors can help you consider your different options and what might make the most sense for your situation.
- If you have a qualified longevity annuity contract (QLAC) (i.e., deferred annuity contract) purchased with IRA or defined contribution plan funds: Before payments from the contract start, as late as age 85, QLACs are generally exempt from the RMD rules, creating a current reduction in the account’s taxable RMD. The SECURE 2.0 Act also enhanced the usability of these accounts, now permitting up to $210,000, adjusted annually for inflation, to be used for investment with no percentage cap.
Inherited RMDs: What path should you take?
If you inherit an IRA, you may want to stretch out the RMDs for as long as possible. This gives the money in the account more time to grow on a tax-deferred basis.
How long you can defer these distributions for depends on when the IRA was inherited. If a beneficiary inherited the IRA prior to 2020, the general rule is that they can stretch distributions over their lifetime. However, if the IRA was inherited after 2019, it’s subject to more complicated rules created by the SECURE Act of 2019.
Below is a general summary of these options. This chart is intended to provide a high-level overview of available options for RMDs. You should always consult your tax and legal advisors to make sure you understand the RMD rules that apply to your particular facts and circumstances. 3
This table provides a general summary of your options if you inherit an IRA. If the owner died before beginning RMDs: A spouse can treat the account as their own, distribute over a 10 year period OR take annual distributions based on their life expectancy but may delay starting until the year the account owner would have begun taking RMDs. A minor child, a person who is disabled or chronically ill, or a person no more than 10 years younger than the original owner can withdraw the entire account within 10 years of the owner’s death or take RMDs based on their life expectancy. Other individuals must withdraw the entire account within 10 years of the owner’s death and are not required to take distributions during the 10-year period and can fully distribute the plan assets at the end. An entity can withdraw the entire account within five years of the owner’s death. Special rules apply if a trust is the beneficiary. Consult your tax and legal advisors. If the owner died after beginning RMDs: A spouse can treat the account as their own or take annual distributions based on their life expectancy or the owner’s life expectancy as of his/her year of death, whichever is longer. A minor child, a person who is disabled or chronically ill, or a person no more than 10 years younger than original owner, can take RMDs based on their life expectancy or the original owner’s. Other individuals must take a distribution each year until all of the assets are withdrawn by the end of the 10-year period An entity can take annual distributions based on the owner’s life expectancy as of his/her year of death. Special rules apply if a trust is the beneficiary. Consult your tax and legal advisors.
Note that the above table shows the minimum amount you’ll need to take. You can always take more than this amount, up to the full account balance.
If the beneficiary of an inherited IRA passes, the account is then transferred to the beneficiaries the original beneficiary has designated. In general, the beneficiaries of a deceased beneficiary must continue to take the required minimum distributions so that the original beneficiary’s remaining interest is distributed within 10 years after the beneficiary’s death, or in some cases within 10 years after the original owner’s death. The rules are highly nuanced, so it’s critical to consult your tax advisor if this is your situation.
We can help
It isn’t always easy to understand your choices or the rules you’ll need to follow when it comes to your retirement accounts. Your J.P. Morgan team can help make sure you not only take your RMDs properly every year, but also make the most of your retirement accounts so that you may reach your financial goals.
1Applies to anyone born in years 1951-1959. RMDs begin at age 75 for those born in 1960 and onward. Prior to the SECURE Act 2.0 passed in 2022, RMDs began at age 72 or 70½.
2For Roth IRAs, an original owner has no RMD. For Qualified Retirement Plans, an original account owner might be able to start RMDs later than age 73 if he/she is currently working at the employer sponsor of the plan, the plan documents permit the delay, and the owner is not a 5% owner of the employer.
3These rules only apply to accounts where the owner died after December 31, 2019. Accounts inherited before that date do not fall within this legislation.
