Distributions & Required Minimum Distributions
Understanding distribution rules is crucial for retirement planning and avoiding costly penalties.
Early Distribution Penalty
The 10% Penalty
Applies to distributions from qualified plans and IRAs before age 59½.
Penalty is on the taxable portion of the distribution.
Exceptions to 10% Penalty
IRA Exceptions (Section 72(t))
| Exception | Description |
|---|---|
| Age 59½+ | Standard distribution age |
| Death | Distributions to beneficiary |
| Disability | Total and permanent disability |
| First-time home | Up to $10,000 lifetime |
| Higher education | Qualified education expenses |
| Medical expenses | Unreimbursed expenses > 7.5% of AGI |
| Health insurance | Premiums while unemployed (12+ weeks) |
| SEPP | Substantially equal periodic payments (72(t)) |
| IRS levy | IRS takes the distribution |
| Birth/adoption | Up to $5,000 per event |
Additional Employer Plan Exceptions
| Exception | Description |
|---|---|
| Age 55 separation | Leave employer at age 55+ (not for IRAs) |
| QDRO | Qualified domestic relations order (divorce) |
| Corrective distributions | Excess contributions returned |
| ESOP dividends | Dividends from employer stock |
SEPP (72(t) Distributions)
Substantially Equal Periodic Payments:
- Must continue for 5 years OR until age 59½ (whichever is longer)
- Three calculation methods: life expectancy, amortization, annuitization
- If modified before end of period, 10% penalty applies retroactively to ALL distributions
- Irrevocable once started
Required Minimum Distributions (RMDs)
SECURE 2.0 RMD Age
| Birth Year | RMD Starting Age |
|---|---|
| Before 1951 | 72 |
| 1951-1959 | 73 |
| 1960 and later | 75 (starting 2033) |
Accounts Subject to RMDs
| Account Type | RMDs Required? |
|---|---|
| Traditional IRA | Yes, at age 73 |
| SEP IRA | Yes, at age 73 |
| SIMPLE IRA | Yes, at age 73 |
| 401(k), 403(b) | Yes, at age 73 (or retirement, if later) |
| Roth IRA | NO (owner's lifetime) |
| Roth 401(k) | NO (after SECURE 2.0) |
RMD Calculation
RMD = Prior Year-End Account Balance / Life Expectancy Factor
Life expectancy factor from IRS Uniform Lifetime Table (or Joint Life Table if spouse is sole beneficiary and 10+ years younger)
RMD Deadlines
| RMD | Deadline |
|---|---|
| First RMD | April 1 of year following year turning 73 |
| Subsequent RMDs | December 31 of each year |
Warning: If you delay first RMD to April 1, you must take TWO RMDs in that year.
RMD Aggregation Rules
| Account Type | Aggregation |
|---|---|
| IRAs | Calculate separately, can withdraw from any IRA |
| 401(k)s | Must withdraw from EACH plan separately |
| 403(b)s | Can aggregate among 403(b) accounts |
Penalty for Missing RMD
| Penalty | Amount |
|---|---|
| Standard Penalty | 25% of shortfall (reduced from 50% under SECURE 2.0) |
| If Corrected Timely | 10% of shortfall |
| Correction Period | End of 2nd year following year RMD was due |
Inherited IRA Rules (Post-SECURE Act)
10-Year Rule (Most Non-Spouse Beneficiaries)
For IRAs inherited after December 31, 2019:
| If Original Owner Died... | Annual RMDs Required? | Account Depletion |
|---|---|---|
| Before RMD age | No | By end of year 10 |
| After RMD age | Yes (years 1-9) | By end of year 10 |
Eligible Designated Beneficiaries (Exceptions to 10-Year Rule)
Can still use "stretch" IRA (life expectancy):
- Surviving spouse
- Minor children (until age 21, then 10-year rule)
- Disabled individuals
- Chronically ill individuals
- Beneficiaries not more than 10 years younger than deceased
Rollovers and Transfers
Direct Rollover (Trustee-to-Trustee)
| Feature | Description |
|---|---|
| Method | Funds move directly between custodians |
| Withholding | None |
| Frequency | Unlimited |
| Deadline | N/A |
| Preferred? | Yes |
Indirect Rollover (60-Day)
| Feature | Description |
|---|---|
| Method | Check to you, you deposit within 60 days |
| Withholding | 20% on 401(k) distributions |
| Frequency | Once per 12-month period (IRA-to-IRA) |
| Deadline | 60 days from receipt |
| Risk | Miss deadline = distribution + penalty |
In Practice
Key planning considerations:
- Delay first RMD if possible, but avoid "double RMD" year
- Roth conversion may reduce future RMDs
- QCDs (Qualified Charitable Distributions) satisfy RMDs for those 70½+
- Consider inherited IRA 10-year rule in estate planning
- Always use direct rollover when possible
On the Exam
Series 65 frequently tests:
- RMD starting age (73 for most, 75 starting 2033)
- Roth IRA has NO RMDs during owner's lifetime
- 25% penalty for missed RMD (reduced from 50%)
- 10-year rule for non-spouse inherited IRAs
- Early withdrawal exceptions (especially 55 separation rule for 401(k))
Key Takeaways
- RMDs begin at age 73 (75 for those born 1960+)
- Roth IRAs and Roth 401(k)s have NO RMDs during owner's lifetime
- Missed RMD penalty: 25% (10% if corrected timely)
- Most non-spouse beneficiaries must deplete inherited IRA within 10 years
- First RMD can be delayed to April 1, but creates "double RMD" year
- Direct rollovers are preferred over 60-day indirect rollovers
Test Your Knowledge
Under SECURE 2.0, the penalty for failing to take a Required Minimum Distribution is:
A
B
C
D
Test Your Knowledge
A 401(k) participant who separates from service at age 56 and takes a distribution:
A
B
C
D
Test Your Knowledge
Under the SECURE Act, most non-spouse beneficiaries who inherit an IRA must:
A
B
C
D