Required Minimum Distributions—often referred to as RMDs—are amounts that the federal government requires you to withdraw each year from traditional Individual Retirement Accounts (IRAs) and employer-sponsored retirement plans after you reach age 72 (age 73 if you turn 72 after December 31, 2022). You can always withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal tax penalty.

The RMD rules are designed to spread out the distribution of your entire IRA or retirement plan account over your lifetime. The purpose of the RMD rules is to ensure that people don't just accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. Instead, Required Minimum Distributions generally have the effect of producing taxable income during your lifetime.

Which Retirement Savings Options Are Subject to RMD Rules?

In addition to traditional IRAs, simplified employee pension (SEP) IRAs and SIMPLE IRAs are subject to the RMD rules. Roth IRAs, however, are not subject to these rules while you are alive. Although you are not required to take any distributions from your Roth IRAs during your lifetime, your beneficiaries will generally be required to take distributions from the Roth IRA after your death.

Employer-sponsored retirement plans that are subject to the RMD rules include qualified stock bonus plans and qualified profit-sharing plans, including 401(k) plans. Section 457(b) plans and Section 403(b) plans are also generally subject to these rules. If you are uncertain whether the RMD rules apply to your employer-sponsored plan, you should consult your plan administrator.

When Must RMDs Be Taken?

Your first required distribution from an IRA or retirement plan is for the year you reach age 72. However, you have some flexibility as to when you may take this first-year distribution. You can take it during the year you reach age 72, or you can delay it until April 1 of the following year.

Required distributions for subsequent years must be taken no later than December 31 of each calendar year until you die, or until your balance is reduced to zero. This means that if you opt to delay your first distribution until April 1 of the following year, you will be required to take two distributions during that year—the second being on or before December 31.

How Are RMDs Calculated?

RMDs are generally calculated by dividing your traditional IRA or retirement plan account balance by a life expectancy factor specified in IRS tables. Your account balance is usually calculated as of December 31 of the year preceding the calendar year for which the distribution is required to be made. To learn more about the rules and exceptions concerning the calculation of RMDs, visit IRS.gov.

Keep in mind that if you have multiple IRAs, an RMD is calculated separately for each IRA. However, you can withdraw the required amount from any one or more IRAs. Inherited IRAs are not included with your own for this purpose. Additionally, if you participate in more than one employer retirement plan, your RMD is calculated separately for each plan and generally must be paid from that plan. The exception is 403(b) tax sheltered annuities.

Should You Delay Your First RMD?

Remember, you have the option of delaying your first distribution until April 1 following the calendar year in which you reach age 72.

You might delay taking your first distribution if you expect to be in a lower income tax bracket in the following year, perhaps because you are no longer working or will have less income from other sources. However, as previously mentioned, if you wait until the following year to take your first distribution, your second distribution must be made on or by December 31 of that same year.

Receiving your first and second RMDs in the same year may not be in your best interest. Since this "double" distribution will increase your taxable income for the year, it may cause you to pay more in federal and possibly state income taxes. It could even push you into a higher federal income tax bracket for the year. In addition, the increased income may cause you to lose the benefit of certain tax deductions that might otherwise be available to you. Ultimately, the decision of whether to delay your first required distribution can be important and should be based on your needs and personal tax situation.

What If You Fail to Take RMDs As Required?

You can always withdraw more than you are required to from your IRAs and retirement plans. However, if you fail to take at least the RMD for any year, or if you take it too late, you will be subject to a federal penalty. The penalty is a 25% excise tax on the amount by which the RMD exceeds the distributions made to you during the taxable year. This could be decreased to a 10% excise tax if corrected within two years.

The professionals at Busey Wealth Management know that navigating IRS rules while planning for financial success in retirement can be overwhelming, which is why they are here to help you prepare. To learn more or to find an advisor near you, visit busey.com/wealth-management.

This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.

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