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Required Minimum Distributions (RMDs) from qualified plans are the minimum amounts that individuals must withdraw from their tax-advantaged retirement accounts once they reach a certain age. These qualified plans include traditional Individual Retirement Accounts (IRAs), 401(k) plans, 403(b) plans, and other employer-sponsored retirement accounts. The exception to RMDs is Roth accounts, such as IRAs and now Roth 401(k)s, with the passage of SECURE Act 2.0. (Setting Every Community Up for Retirement)
The purpose of RMDs is to ensure that individuals do not indefinitely defer paying taxes on their retirement savings. The Internal Revenue Service (IRS) sets rules regarding the timing and amount of RMDs to ensure that individuals start using their retirement funds for their intended purpose—retirement income.
The specific rules for RMDs depend on the type of retirement account and the age of the account holder. Here are some key points to consider:
Age for RMDs: For most retirement accounts, individuals are required to start taking RMDs once they reach age 72. However, if you were born before July 1, 1949, the previous rule required RMDs to start at age 70½. The SECURE Act, enacted in 2019, raised the RMD age to 72 from 70-1/2. This was the first age increase since RMDs were first created in 1974 under the Employee Retirement Income Security Act (ERISA). Younger individuals now have RMDs at a higher age. (See the chart below.)
Distribution Calculation: The RMD amount is determined by dividing the account balance as of the end of the previous year by a life expectancy factor, as specified by IRS tables, IRS Publication 590. The life expectancy factor is based on the account owner’s age.
Timing of Distributions: The deadline for taking the first RMD is generally April 1 of the year following the year you reach the required distribution age. For subsequent years, the deadline is December 31.
Penalty for Non-Compliance: If an individual fails to withdraw the required minimum distribution or withdraws less than the required amount, the IRS imposes a substantial penalty. The penalty is now generally 25% of the amount that should have been withdrawn, recently reduced from 50%.
It’s important to note that RMD rules are subject to change, and the specific details can vary based on individual circumstances and applicable tax laws. So it’s advisable to consult with a tax advisor or financial professional to ensure compliance with the most up-to-date regulations.
RMDs are calculated based on the account balance and life expectancy, as determined by IRS life expectancy tables. The purpose of RMDs is to ensure that individuals with tax-advantaged retirement accounts withdraw a minimum amount each year and pay the appropriate income taxes on those distributions. If an individual fails to take the required distribution, they may be subject to penalties.
NAIFA strongly supports state requirements for public high school students to complete personal finance coursework prior to graduation. Starting financial education in high school gives students a leg up and will help them make better financial decisions when they enter the workforce. High school personal finance courses may also inspire some students to pursue financial services as a career.
NAIFA chapters are actively promoting financial curriculum requirements in their states. Currently, 19 states have passed measures to require public high school students to take a one-credit personal finance course prior to graduation. Eight of these have requirements in place, and 11 have begun the implementation process. As of April 3, 2023, there are 19 states with active legislation to add a standalone one-credit personal finance course to high school graduation requirements.