Required Minimum Distributions from Retirement Plans

Money cannot stay in a retirement plan account forever. In most cases, you are required to take minimum distributions, or withdrawals, from your 401k, IRA, or other retirement plan after you reach 70 1/2 years old. Though you can withdraw more than the minimum amount, you may have to pay income tax on your retirement income.

Are Retirement Plan Distributions Taxable?

In general, distributions from retirement plans (not including Roth accounts) are included in your taxable income. Qualified Roth distributions are tax-free because Roth contributions are already taxed, unlike regular retirement plan contributions. However, if you take an early, non-required distribution, yhey may come with an additional tax penalty. Find out all about taxes on early withdrawals from retirement plans.

Rollovers

A rollover is a distribution from a retirement plan that is contributed directly to another qualified retirement plan or IRA. If you rollover a distribution within 60 days of receiving it, the amount is generally NOT taxable. You generally cannot rollover required minimum distributions.

Required Minimum Distributions (RMDs)

When you prepare and file your tax return on efile.com, you don't have to use any IRS tables or publications to figure out your distribution amounts. Once you answer a few simple tax questions, we will generate the correct tax forms for your distributions, as well as calculate and report the correct amount on your return. 

How to Determine When to Start Taking Required Distributions

The time you start taking required distributions depends on the type of retirement plan you have: 

  • IRAs (traditional, Roth, SEP, and SIMPLE): You must withdraw your first required minimum distribution on April 1 of the year AFTER the year you turn age 70 1/2.
  • 401(k)s, 403(b)s, and other non-IRA retirement plans: The deadline to take your first required minimum distribution is April 1 of the year after EITHER the year you turn 70 1/2 OR the year you retire.

When to Withdraw Money After Turning 70 1/2 Years Old

For every year after you turn 70 1/2 years old (or the year you retire), you can withdraw money anytime. However, you must withdraw your full required minimum distribution by December 31 of each year.

However, if you want to wait until April 1 to take your first distribution, you may owe taxes on two distributions in one year (the first distribution, from the previous year, and the one for the current year, due by Dec. 31). But you can withdraw your first required minimum distribution by December 31 of the year in which you turn 70 1/2 (or retire, for non-IRAs) instead of waiting until April 1 of the following year and avoid paying taxes on two distributions in one year.

Penalties for Not Taking Required Minimum Distributions

If you do not take your required minimum distributions, there are serious tax penalties. If you fail to withdraw the required minimum amount, you may have to pay a 50% excise tax on the amount that was not withdrawn. That is 50% of the difference between the required distribution and the actual distribution.

You may be able to excuse yourself from any tax penalties if you missed the 60-day period for rolling your distribution amounts into another retirement plan or IRA. To do this, you will need to go through a self-certification waiver procedure from the IRS. Once the IRS qualifies you for the waiver, you send a self-certification letter to your retirement plan's administrator or trustee (who is receiving the rollover) to inform them that you qualify to be excused from the penalties. 

In order to qualify for the waiver, you would need to meet one or more of 11 circumstances provided by the IRS, including (but not limited to): 

  • Your home was severely damaged.
  • One of your family members was seriously ill or died. 
  • A distribution check was misplaced and never deposited. 
  • You were incarcerated or a foreign country imposed restrictions on you. 

The IRS may grant you a waiver during a subsequent examination of your tax return, even if you do not go through a self-certification. 

To avoid any delays and restrictions that may happen during the rollover process, and if you wish to transfer your retirement plan or IRA distributions to another retirement plan or IRA, the IRS recommends that you request your administrator or trustee to make a direct trustee-to-trustee transfer. 

What Happens After the Death of a Plan Holder

It may be an unpleasant topic, but this is a real concern for a lot of people. For the year in which the account holder dies, the regular required minimum distribution must still be made. For the following year, the required minimum distribution will depend on the age of the beneficiary.

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