What the Heck is an RMD

Congress created it.  Their intent was to prevent folks from letting their retirement savings continue to accumulate when somebody reaches retirement age.  Once again, Congress seems to know definitively when everyone should retire.

RMD stands for Required Minimum Distribution.  The Internal Revenue Code (written by Congress) requires a taxpayer to begin taking withdrawals from their traditional IRA, SIMPLE IRA, SEP IRA or retirement plan account when they reach 73 years old (75 for those born in 1960 or later).  There is an exception for regular retirement plans, but I’m not getting into that here.

The IRS provides a table to be used for calculating how much to withdraw from your account each year.  Basically, you divide the fair market value (FMV) of the account by the number found in that IRS table.  There are multiple tables.  So, the first step is to figure out which one applies to you.  Let’s do an example for 2026.  Let’s say the FMV of your IRA account was $1,000,000 last December 31, 2025.  You are 74 years old.  The Table III (Uniform life table) says your “distribution period” in years is 25.5.  Thus, you divide the $1,000,000 by 25.5 and you get $39,216.  That is your RMD for 2026 in this scenario.

But wait!  There’s more.  Let’s say you inherited the retirement account.  Now your RMD is 10 years.  In our example above, the $1,000,000 is an inherited IRA now.  Divide that by 10 years, making your RMD this year $100,000.  Next year, you divide by 9 years.  Then 8, etc.  By the 10^th year, no matter what the balance is, you must take the rest.  There is an alternative for inherited accounts.  The 10-year rule does not require you to take RMDs, just that the account is fully distributed by year 10.  You could time the RMDs on this account to coincide with lower tax bracket years.  As always, there are exceptions to this 10-year rule.  Consult with a tax professional if you need more help.

Did you notice I did NOT mention ROTH based accounts (IRA or 401k)?  That’s because they do not have RMD rules for the account owner.  But those who inherit such accounts are subject to the inherited RMD rules.

There is a way to reduce the taxable income from an RMD.  Congress has created a process where you can have your IRA type account (not 401K), give up to $100,000 a year to a qualified charity.  Keep good records for your tax preparer, because the 1099-R from the IRA will not be correct.

Oh, did you know there is another wrinkle involving inherited retirement accounts?  For the year of the account holder’s death, the RMD due is the amount the account holder would have been required to withdraw but did not withdraw before death.  The beneficiary(s) who inherits a traditional retirement account is responsible for paying income tax on the year-of-death RMD that was not completed by the decedent.  The Beneficiary is taxed at their normal income tax rates, not the decedent’s.  The deadline for completion of the year-of-death RMD without penalty is December 31 of the year in with the account holder died.

Did you hear?  Psalm 119:34 says, “Give me understanding, and I will keep your law.  Yes, I will obey it with my whole heart.”

Kelly Bullis is a Certified Public Accountant in Carson City.  Contact him at 775-882-4459.  As well as on our website at BullisAndCo.com. You can also find us on LinkedIn and Facebook.