What is a required minimum distribution (RMD)?
An RMD is the minimum amount that the IRS requires you to withdraw from your IRA each year once you reach a certain age. The exact amount changes from year to year based on several factors (see below).
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 and the coronavirus outbreak.
The SECURE Act, which went into effect on January 1, 2020, changed RMD rules by raising the age at which investors must take their first required minimum distribution from 70½ to 72.
The CARES Act coronavirus relief law, which passed in March of 2020, provided a one-year suspension of RMDs. It also waved the penalty for not taking that distribution. Typically, investors who skip an RMD are subject to a penalty equal to 50% of the required withdrawal amount.
Going forward, investors who turned 70½ in 2020 or after are now required to take their first RMD by April 1 of the year they reach 72. After that, each yearly RMD must be taken by December 31.
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 the IRS’s “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 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 send out annual notices with your yearly RMD requirement.
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 50% 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 $1,500 — or half of the amount that wasn’t distributed.
For more information on this topic, you may visit the IRS website. For guidance on RMDs, it’s always best to work with a financial advisor or tax advisor to ensure you are meeting your minimum distribution requirements while also staying on the path to achieve your retirement goals.
Does an RMD Apply to Me if I Only Have Real Estate in My IRA?
There is a little-known RMD rule that may allow you to take the distribution in-kind by re-registering a portion of the asset. This is a common solution for our account owners who hold real estate in their Pacific Premier Trust IRAs since it’s problematic to partially liquidate this kind of investment. The IRS will allow you to distribute part of the property to yourself via grant deed, which means that your IRA will continue to own part of the property, but you will then personally own the part that is distributed. This method can also work for mortgage-backed notes using a partial assignment of deed of trust/mortgage.
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).
- Take the distribution in-kind (see answer to previous question).