Required Minimum Distributions (RMD) in an IRA: The Basics

If you have a Traditional IRA and you are 73, you have a required minimum distribution or RMD. For every pre-tax retirement plan, you must take a taxable distribution on an annual basis. The amount you are required to withdraw is determined by the prior year-end balance, your age, and sometimes your beneficiary’s age (if the primary beneficiary is your spouse). Several websites offer easy-to-use RMD calculators, including the one found at www.midlandtrust.com.

RMD Deadlines & Penalties

The deadline to withdraw any RMD is December 31. The penalty for not taking an RMD by the deadline is 25% of any amount not withdrawn.  If the mistake is corrected during a two-year ‘correction window’ the penalty is further reduced to 10%.    

For example, Mary, 73, has a Traditional IRA account. She is required to take an RMD of $6,000.00. Mary only withdraws $4,000.00. She is then taxed 25% on the $2,000.00 amount not withdrawn. She must pay the IRS a penalty of $500 (the penalty is 10% or $200 if corrected within the two-year window.)

Important RMD Changes in 2023

Beginning in 2023, the SECURE 2.0 Act raised the age that you must begin taking RMDs to age 73. The following is a recap and the full IRS regs are here. 

• April 1, 2023 -  if you turned 72 over the course of 2022, you must take your first RMD by April 1, 2023. 
• December 31, 2023: If you turned 72 during 2022, your second RMD is due based on your account balance on December 31, 2022 
• December 31 – deadline to withdraw your RMD for that calendar year for other individuals not affected by the special rule if you turned 72 in 2022.

No Cash? No Problem!

If you have a self-directed IRA, then you may have investments that cannot be easily liquidated. A non-cash asset can be withdrawn from the IRA to satisfy the RMD. The account holder will need to provide a current and acceptable valuation and any necessary re-registration paperwork. For example, Fred is holding real estate in his IRA. His RMD is $30,000.00. Fred obtains a certified appraisal for one of his account properties, valued at $50,000.00. Fred can distribute all or a part of the property. He will need to have a Deed prepared to re-title all or a percentage of the asset.

Discuss Your RMD With a CPA

If you are already 72 or older and have not yet taken an RMD, you should speak with your CPA to discuss the best course of action. If you are turning 73in 2023 or in the near future, you may want to meet with your CPA to discuss how taking taxable distributions will affect your income status. When faced with the 25% penalty,, your CPA may be able to help you weigh the pros and cons of the payout versus the potential expenses associated with taking the RMD.

Review of RMD Quick Facts

Important RMD Dates

• April 1, 2023 -  if you turned 72 over the course of 2022, you must take your first RMD by April 1, 2023. 
• December 31, 2023: If you turned 72 during 2022, your second RMD is due based on your account balance on December 31, 2022 
• December 31 – deadline to withdraw your RMD for that calendar year for other individuals not affected by the special rule if you turned 72 in 2022.

Important RMD Rules

• 25% tax penalty for not taking an RMD; reduced to 10% if corrected within a two-year window
• Each pre-tax retirement plan has a separate RMD amount

Important RMD Information

• RMD can be satisfied by cash or non-cash withdrawals
• Asset values should be updated annually to calculate an RMD accurately
• A non-cash distribution will require a current validation for 1099 reporting
• Speaking with a tax professional each year may help in avoiding penalties or additional taxes

For more information on Required Minimum Distributions (RMDs) in your self-directed retirement account, feel free to contact Midland.

MIDLAND TRUST IS NOT A FIDUCIARY: Midland’s role as the custodian of self-directed retirement accounts is non-discretionary and administrative in nature. The account holder or authorized representative must direct all investment transactions and choose the account’s investment(s). Midland has no responsibility or involvement in selecting or evaluating any investment. Nothing contained herein shall be construed as investment, legal, tax, or financial advice or as a guarantee, endorsement, or certification of any investments.