As 2022 comes to a close, individuals who are age 72 or older must ensure they’ve taken their required minimum distribution (RMD) from their retirement account(s). The good news is they can use this money to pay for senior care

An older adult man sits in front of a laptop computer and smiles while he talks on a cell phone.

The cost of senior living can add up quickly, especially if you require round-the-clock assistance or live in a senior living facility. While you may have Social Security benefits, opting for monthly or quarterly payments from your RMD can assist loved ones with your care or even provide extra spending money for items such as walkers, health emergencies, wheelchairs, home care, medications, meals, and more.

Here’s what you need to know about the rules and guidelines for required minimum distributions and why it’s important to take them.

Rules and guidelines for Required Minimum Distributions

Who must withdraw a Required Minimum Distribution?

Retirees must begin receiving their required minimum distributions the year they turn 72 and every year thereafter. After the first year, you are required to take your RMD by December 31 of each year. Different deadlines may be applicable to 403(b) plans that retirees contributed to before 1987.

If the retirement plan owner has an IRA account or owns 5% or more of the business sponsoring their own retirement plan, they must take their RMD annually starting at the age of 72 whether or not they are retired. Retirees who have contributed to a retirement account and/or an IRA owner must take the minimum distributions from their accounts each year or they will face penalties.

What happens if I don’t take my RMD?

Beneficiaries and account holders of 401(k) accounts will incur penalties if they don’t take their required minimum distributions from all accounts by the deadline. For instance, the remaining amount will be taxed at 50% and you will have to submit IRS Form 5329 when filing a federal tax return. On this form, the account holder will fill out Part IX: Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs). If you did not take out the total RMD in error or there were extenuating circumstances, there’s a chance your fee will be waived. Attach a letter of explanation to Form 5329 when submitting your federal tax return to see if you qualify for the waived fee.

What accounts do RMDs apply to?

Retirees must take a required minimum distribution from any employer-sponsored retirement plan, including

  • Profit-sharing plans. These plans allow employees to take a share of the company’s profits as a pension plan, usually up to 25% of the company’s payroll.
  • 401k plans. These plans include traditional 401(k) plans, safe harbor 401(k) plans, and SIMPLE 401(k) plans.
  • 403(b) plans. These types of plans will typically apply to specific public school employees, employees of tax-exempt organizations, and some ministers.
  • 457(b) plans. These tax-advantaged plans apply to government and certain non-government employees.
  • Traditional IRA accounts. These accounts include IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
  • Roth 401(k) accounts. While retirees with Roth 401(k) plans are required to take RMDs, these regulations do not apply to a Roth IRA account while the retiree is still living. However, a beneficiary of a Roth IRA may have to take RMDs.

How to take your Required Minimum Distribution

Before taking your required minimum distribution, calculate how much you’re required to remove from your accounts each year. First, find your life-expectancy factor as determined in the IRS Life Expectancy Tables in Appendix B of IRS’s Distributions from Individual Retirement Arrangements (IRAs) page. Then, divide your account balance by this number to find your RMD.

Those who hold multiple IRAs must use this calculation for each account. Once you add up the total RMD, you can use either multiple accounts or a singular account to take the entire amount by the deadline. For example, if you have an IRA account smaller than your total RMD, you can take out the balance of this smaller account and take the rest of your RMD total from another IRA account. On the other hand, if you hold multiple traditional retirement accounts, you must calculate the RMD for each account and take them out separately. 

You can choose to take your RMD out in a lump sum by the deadline, or you can take out certain amounts of RMD throughout the year in monthly or quarterly installments, for example. Ensure you take out your total RMD by the December 31 deadline.