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Often, in the financial world, terminology can be used that the average person may not understand or have a firm grasp on what is being said since they don’t use it in their daily life. As we strive to have the heart of a teacher here at Whitaker Myers Wealth Managers, we find it important to educate others on what these terms mean and what they imply for the client. This article is intended to inform the reader about what an RMD is and what rules are associated with it.

 

What is an RMD?

RMD is an acronym for “Required Minimum Distribution”. RMDs apply to Traditional IRAs, Simple IRAs, SEP IRAs, Inherited IRAs, and most employer-sponsored retirement plan accounts, such as 401(k)’s and 403(b)’s. Your Roth accounts, including Roth 401(k)’s, Roth 403(b)’s, and Roth IRA’s, are not subject to RMDs. Inherited IRAs also follow different rules than all other accounts; because of that, we will talk about those last.

 

When do RMDs start?

RMDs typically start April 1st following your 73 birthday. One exception for this applies to employer-sponsored plans. If that company still employs you, then you are not subject to RMDs for that plan only.

 

If you were to have an employer-sponsored plan from an old company that you no longer work for but are employed by a different company, then you are required to take RMDs from your former plan but not your current one. This exception does not apply if you own 5% or more of the business sponsoring the plan.

 

Inherited IRAs

Inherited IRAs are very different from these rules. The type of account doesn’t matter for Inherited IRAs, so both Roth and Traditional accounts are subject to the same RMD rules.

 

Rules for Inherited IRA RMDs differ based on the year of death, the relation with the deceased, and the age at the time of death. If the person you inherited the IRA from passed before 2020, you have the option to roll that account into your IRA if you are the spouse. The other options for both spouses and non-spouse beneficiaries are to take distributions based on their own life expectancy, or they may follow the 5-year rule.

 

The 5-Year and 10-Year Rule

The 5-year rule says that the account must be liquidated by the end of the 5th year after the year of death. If the person were to have died in 2020, the year 2020 does not count towards their years. There is no required way to take these distributions as long as the account is empty at the end of the 5th year. Theoretically, you could withdraw the whole account on the last day of the 5th year.

 

If the deceased passed after 2020, age becomes a factor. If they were over 75, the spouse has the option to roll the account into their own IRA or take distributions based on their own life expectancy. Non-spouses have some stipulations with them. There is such a thing as an “eligible designated beneficiary” with them. This is considered a disabled or chronically ill individual or an individual who is not more than ten years younger than the deceased. An eligible beneficiary has the option to take distributions over their life expectancy or follow the 10-year rule. In contrast, those individuals not considered eligible designated beneficiaries can only follow the 10-year rule. The 10-year rule requires the account to be liquidated within ten years, but it is on a schedule (unlike the 5-year rule).

 

If they were not over 75 when they passed, then the rules look slightly different. The spouse can delay distributions until the deceased would have turned 72 if it applies, take distributions based on their life expectancy, follow the 10-year rule, or roll the account into their own IRA. Non-spouse beneficiaries must follow the 10-year rule regardless of whether or not they are eligible designated beneficiaries.

 

Consulting with an advisor

These rules can be very difficult to follow, so the best course of action is to check with your advisor to ensure you are following them correctly. If you do not have one, schedule with one of our ten financial advisors on our team; they would be happy to help!

What are “Required Minimum Distributions (RMDs),” and how do these affect me?

June 10, 2024

David Gearhart

Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm.  The information presented is for educational purposes only and intended for a broad audience.  The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed.  Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner. 

Whitaker-Myers Wealth Managers is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed. 

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