Required Minimum Distributions (RMDs) and Which Accounts Require RMDs

This lesson demystifies the rules and regulations surrounding Required Minimum Distributions. It explains the purpose behind RMDs—the government's way of collecting taxes on deferred retirement savings—and clarifies which types of accounts, such as Traditional IRAs and 401(k)s, are subject to them. The session will break down the RMD calculation process in a simple, easy-to-understand manner and underscore the significant financial penalties for non-compliance.

Lesson 4: Understanding Required Minimum Distributions (RMDs) 🏛️

Lesson Objectives:

• Objective: To define what Required Minimum Distributions (RMDs) are and explain their purpose within the tax code.

• Objective: To help participants identify which of their accounts are subject to RMD rules and which are exempt.

• Objective: To demystify the RMD calculation process and explain the significant penalties for non-compliance.

Detailed Content:

1. What is an RMD and Why Does it Exist?

   • Explain that RMDs are mandatory withdrawals from retirement accounts that have enjoyed tax-deferred growth for years.

   • The government's purpose is simple: To collect the taxes that were deferred during the accumulation phase.

   • Introduce the key concept of the RMD age, which was recently changed. Emphasize that it's now generally 73 for those who turn 72 after 2022.

   • Explain that the RMD is calculated annually and must be taken by December 31st of each year.
     
     

2. Which Accounts Are Subject to RMDs?

   • List the common accounts that require RMDs:

     • Traditional IRAs

     • SEP IRAs

     • SIMPLE IRAs

     • 401(k), 403(b), and 457(b) plans

     • Most small business retirement plans.

   • Highlight the crucial exception: Roth IRAs for the original owner are exempt from RMDs. This is a major selling point for Roth accounts.

   • Mention that if you are still working for a company, you may be able to delay your RMD from that specific company's 401(k) plan until you retire, as long as you don't own 5% or more of the company.
     
     

3. The RMD Calculation: Demystified:

   • Explain the two-part calculation without getting into complex math.

   • Part 1: Account Balance. The balance is taken on December 31st of the previous year. For example, your 2025 RMD is based on your account balance on December 31, 2024.

   • Part 2: Life Expectancy. The IRS provides a table (the Uniform Lifetime Table) that assigns a "life expectancy factor" based on your age.

   • The Formula: RMD = Previous Year's Account Balance / Life Expectancy Factor

   • Walk through a simple example: a 73-year-old with a $500,000 IRA. Show how the factor (from the table) leads to a specific dollar amount for the RMD.
     
     

4. The Penalty for Non-Compliance:

   • Warn participants about the serious financial consequences of missing an RMD.

   • The penalty is a significant 25% tax on the amount that should have been withdrawn.

   • Emphasize the importance of setting up automatic withdrawals or working with a financial advisor to ensure this doesn't happen.

Lesson 4 Additional information and resources

These resources introduce you to the topics that we will be covering in these lessons

Calculate your RMD  -  select the "Estimated lifetime projection" to see a graph of your withdraw.  Also you can adjust the estimate rate of return and see how it effects your lifetime projection.

RMD Calculator -