RMDs in Real Life: How to Explain IRA Required Minimum Distributions to Your Clients
By Jodie Norquist, CIP, CHSP
My client, Mark, just turned 73 and wants to know why he’s suddenly required to take money out of his IRA. How do you explain required minimum distributions (RMDs)?
Mark has likely been saving in his Traditional IRA for decades, enjoying the tax deduction and tax-deferred growth. Now the IRS wants its turn. RMDs are simply the government’s way of saying you’ve deferred taxes long enough, and it’s time to recognize these assets as income. For Mark, that means taking annual withdrawals from his Traditional IRAs and any 401(k) or other qualified retirement plans that he still owns. Because individuals do not receive a tax benefit for making a Roth IRA contribution, RMDs are not required for Roth IRAs.
Mark heard that he could wait until April 1 of next year to take his first RMD. Is that a good idea?
Technically yes, he can, but practically, maybe not. Because Mark was born in 1953, his applicable RMD age is 73. His first RMD is due in 2026, but can be delayed until April 1, 2027. But if he does that, he’ll also have to take his second RMD by December 31 of that same year. At the very least, two taxable distributions in one calendar year will add to his year’s tax burden, which could potentially push Mark into a higher tax bracket or trigger other taxation dilemmas, but that’s a question for Mark and his competent tax advisor.
How do you explain the RMD calculation to someone like Mark who wants to understand the math?
I always refer clients to IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Turn to Appendix B (page 67), which contains the Uniform Lifetime Table. Let Mark know that the calculation is straightforward. Take the age that he’ll attain on his birthday this year and find the adjacent applicable denominator. Then take his IRA’s December 31, 2025, fair market value and divide it by the applicable denominator.
For example, Mark’s applicable denominator at age 73 is 26.5. Let’s say the IRA’s December 31, 2025, FMV was $250,000. So $250,000 divided by 26.5 is $9,433.96. That’s the minimum amount that he must withdraw to satisfy his 2026 RMD, although he does have until April 1, 2027, to distribute that amount. To calculate Mark’s 2027 RMD, we’ll have to return to the table and find the applicable denominator for age 74, which is 25.5. We will then divide his December 31, 2026, FMV by 25.5 to determine his 2027 RMD.
If Mark has any other Traditional, SEP, or SIMPLE IRAs, we’ll have to calculate the RMDs separately, but he could withdraw all RMDs from each or one of his IRAs. (If Mark has an inherited Traditional, SEP, or SIMPLE IRA, the inherited IRA’s RMD requirements must be satisfied separately.)
What if my client is married to a much younger spouse?
In this case, we would use a different table. For example, Linda, age 74, is married to Tom, who is 60 and the sole beneficiary of her IRA. Because Tom is more than 10 years younger and is the sole beneficiary of her account, Linda can use the Joint and Last Survivor Life Expectancy Table, which starts on Page 52 of Publication 590-B. Her RMD will be smaller because Tom’s age is also factored in when calculating her RMDs.
What does a missed RMD look like in the real world?
Life gets busy, and mistakes happen. Dave, age 75, forgot to take an RMD from an IRA that he opened years ago when he rolled 401(k) plan assets over from a former employer. Unfortunately, because he forgot to take his RMD by December 31, 2025, the amount that he was supposed to take is now subject to a 25 percent penalty tax.
This penalty tax can be reduced to 10 percent if taken timely, which means Dave must take his missed RMD within the “correction window.” This window ends on the earliest of the following dates, according to IRS Publication 590-B.
The date of mailing the deficiency notice with respect to the imposition of the tax,
The date the tax is assessed, or
The last day of the second taxable year that begins after the end of the taxable year in which the additional tax is imposed.
Dave would use Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, to report and pay the penalty tax when he files his 2025 federal tax return. If Dave has a legitimate reason why his RMD was missed, he could also apply for a waiver of the penalty tax by using Form 5329 and attaching a letter of explanation. His competent tax advisor can help him navigate the waiver process, but there is also information found on Page 10 in the Instructions for Form 5329.
