Introduction to required minimum distributions (RMDs) 

Introduction to required minimum distributions (RMDs) 

The Internal Revenue Service (IRS) requires clients withdraw money from their traditional, rollover, SEP, SIMPLE, and qualified plan retirement accounts yearly. These mandatory withdrawals are called required minimum distributions (RMDs) and begin once clients turn the federal RMD age.

The SECURE Act 2.0, which is an expansion of the original SECURE Act, raised the federal RMD age from 70½ to 73, at which individuals must begin taking required minimum distributions (RMDs) from their retirement accounts.

  • The new law only applies to individuals who turn 73 after December 31, 2022.
  • If an individual turned 72 in 2022, this new law does not apply. That individual must take an RMD in 2022, 2023, and beyond.

Key information related to RMDs:

Impacted account types

Clients must take an RMD for:

  • Corporate 401(k)
  • Traditional IRA
  • Rollover IRA
  • Simplified Employee Pension (SEP) IRAs
  • Savings Incentive Match Plan for Employees (SIMPLE) IRAs
  • Schwab's qualified retirement plan (QRP)/Keogh
  • Individual 401(k)
  • Roth 401(k) accounts 
  • 403(b)(7)
  • Inherited IRA (Traditional & Roth)

Clients do not need to take RMDs for Roth IRAs unless they are inherited accounts.

Deadlines

For traditional, rollover, SEP, SIMPLE, and qualified plan clients, the first RMD must be taken no later than April 1, the year after the client reaches the federal RMD age (72 if born prior to 7/1/1950 or 73 if born on or after 7/1/1950). All future RMDs must be taken by December 31 of each year.

Clients who wait until April 1 to take their first RMD are required to take two distributions in the same year: one for the year they turned the federal RMD age and one for the current year. This could have additional tax implications. Client should contact a tax advisor.

Note: Clients who turned 72 in the year 2022 or earlier must still take annual RMDs starting for year 2022. Only clients who would have been turning 73 in the year 2023 or beyond are impacted by the SECURE Act 2.0 RMD provisions. Those individuals are not required to start taking RMDs until the year they turn age 73.

See the examples below:

If your client:They must:
Was born before 7/1/1950Take their first RMD by April 1 of 2023 (to satisfy the 2022 RMD) and then take their 2023 RMD before December 31, 2023.
Was born on or after 7/1/1950Take their first RMD by April 1 of the year following the year they turn age 73 (to satisfy the RMD for their first RMD required year) and then take their second year's RMD before December 31 of that same year.

Inherited IRA and Inherited Roth IRA clients must take distributions by their required distribution date following the original account holder's death. Spouse and certain other beneficiaries called eligible designated beneficiaries of Inherited traditional IRAs, may take lifetime distributions. Alternatively, distributions to designated beneficiaries follow the 10-year rule under which the account must be fully distributed by December 31 of the tenth year after the year of death. Non-designated beneficiaries follow the 5-year rule under which the account must be fully distributed by December 31 of the fifth year after the year of death. Because of the complexities of Inherited IRA distribution rules, clients should seek out their tax advisor for assistance.

Calculations

RMDs must be calculated separately for each IRA a client owns, yearly. To determine an RMD amount, start by listing the fair market value (FMV) of an IRA as of December 31 of the previous year. Then divide the amount by the client's life expectancy. RMDs are not required for Roth IRAs, do not include them in the calculations. Schwab does NOT calculate RMDs or life expectancy payments for Schwab Inherited IRA accounts.

Use Schwab's calculators to estimate annual distributions.

The required minimum distribution amount displayed on Schwab Advisor Center are for retirement accounts held at Schwab. Accounts held at other custodians could impact the total required minimum distribution amount. Please refer to non-Schwab assets when calculating the required minimum distribution.

Participant distributions

Once an IRA RMD amount is calculated, clients can take the total RMD from a single IRA account or a combination of accounts. RMDs from QRPs/Keoghs, individual 401(k) plans, or inherited IRAs must be taken from their respective accounts.

Total required minimum distribution for the year applies to all applicable assets including assets in multiple accounts, both at Schwab and other custodian(s). The IRS does not currently mandate from which account the distribution must be made if the total RMD is met.

For information about adjustments, withdrawal penalties, distribution requirements, and more, refer to the following table:

Beneficiary distributionsRMD rules differ based on the type of IRA account inherited, the year of the original account holder's death, and the type of beneficiary. Beneficiaries of an IRA should review the Inherited IRA Guide to understand the applicable RMD rules.
Distribution optionsSchwab offers several ways to receive distributions, including online distributions, recurring Schwab MoneyLink® distributions, and asset transfers to non-retirement Schwab accounts. Online distributions and MoneyLink are not available for QRPs, Keoghs, or individual 401(k) accounts.
RMD adjustments

The RMD amount is calculated based on the end of year account value. RMDs may need to be adjusted for the following situations:

  • Outstanding rollovers—when another plan or IRA rolls over funds to a Schwab IRA before December 31, but the amount does not settle until after December 31. The rollover amount must be applied to the December 31 FMV.
  • Outstanding transfers—when a custodian initiates a transfer to a Schwab IRA prior to December 31, but the transfer amount does not settle until after December 31. The transfer amount must be applied to the December 31 FMV.
  • Security price corrections—when a security price is corrected after December 31.
Tax ramifications

RMD withdrawals may be subject to federal and state income taxes. See additional tax rules below:

  • Clients can choose to withhold taxes immediately or wait until they file their taxes. Ordinary income tax rates will apply based on IRS and state rules.
  • Unless otherwise directed by the client, the IRS requires Schwab to automatically withhold 10% for federal income taxes. In addition, state withholding may apply.
  • Any request from an account holder to opt out of tax election must be submitted in writing.
Withdrawal penaltiesClients may be liable for a 25% penalty on insufficient RMD withdrawals. If the distribution is corrected within a timely manner (within two years), the excise tax on the failure is further reduced to 10%. To avoid this penalty, advise your client to review the IRS guidelines and consult with a tax advisor. Also, please make sure to provide your request to Schwab by November 15 to ensure timely processing.
Advisor alertsIf your clients are subject to an RMD, you will receive an alert on Schwab Advisor Center® in early February notifying you of your client's RMD obligations.
Client alertsClients with recurring or future dated distributions will receive a proactive Retirement Distribution Alert when there is insufficient cash to process a scheduled distribution. The alert is sent 10 business days before the scheduled distribution date by email or message center, providing clients time to act.
Scheduling RMDsYou may wish to set up your clients' RMDs in advance. Use the IRA Distribution Form to request RMDs from your clients' accounts on a periodic or annual basis. If your clients wish to request their own distributions, refer them to schwaballiance.com.
Reviewing RMDs

RMD data is available on Schwab Advisor Center for certain Schwab accounts. RMD data is available at a firm level on the RMD tab displaying all the details typically received from your service team. RMD data is updated once a day overnight. Refer to the data as of date for the latest update time.

See key features below:

  • Customize the data columns on the grid.
  • Manage yearly distributions easier – Find a list of all Schwab accounts with required distributions by using the checkbox “Only show accounts with RMD remaining for the current year”. 
  • Export data to a spreadsheet with customized columns and filters.
  • Plan for key retirement ages of 72 and 59 ½.

When must my client begin taking their required minimum distribution?
At the age of 59 ½ an account holder is currently eligible to withdraw distributions from a retirement account. At the age of 73 an account holder must take required minimum distributions, as calculated based upon IRS rules taking total year end account value, age, and life expectancy statistics. Failure to take required minimum distributions can carry a substantial tax penalty, which can be as much as 50% of the amount not withdrawn for that year

Will my client receive a notification when it is time for them to take an RMD?
Yes, Schwab notifies affected traditional, rollover, SEP, and SIMPLE IRA clients via IRA statements and Form 5498. RMD amounts and due dates appear in the Distributions Summary section of the statement. RMD information is only available if there was a balance in the account as of December 31 for the tax year.

Can my client take out more than their minimum distribution amount?
Yes. However, additional rules apply. See below for more information.

  • IRAs—Distribution amounts exceeding the RMD do not count toward future RMD requirements.
  • QRPs or 403(b) plans—Distribution amounts exceeding the RMD are subject to a mandatory 20% federal and applicable state tax withholding.

My client forgot to take their RMD last year. What should they do?
If your client missed taking the RMD due to a reasonable error, they can apply for a penalty waiver. Refer your client to the IRS instructions for Form 5329 and their tax advisor for further guidance.

Does Schwab require separate RMD forms for each of my client's IRAs?
Yes. The separate forms are needed for each calculation. However, if the client wishes to take the combined total of all their IRA RMDs from a single IRA, they may indicate that on the form. Qualified plan and Inherited IRA RMD's must be taken from their respective accounts.

Do I still need to take my RMD if I'm going to make a Traditional IRA contribution for the year?
Yes. While after January 1, 2023, you can make a Traditional IRA contribution to your account even if you are older than the RMD age, you still are required to take an RMD from your IRA and pay taxes on that distribution. You can still make an IRA contribution for the same year up to either the contribution limit or your earned income for that year (whichever is less).

The following are available to assist you:

Introduction to individual 401(k) plans
Introduction to qualified retirement plans (QRPs)
Introduction to inherited IRAs
Introduction to SEP-IRAs
Introduction to SIMPLE-IRAs
Introduction to traditional IRAs

Participants should consult with their tax advisor with questions about tax implications.

Find RMD forms, guidelines, and other tax information on irs.gov.

For easy-to-understand information about RMDs, refer clients to Understanding Your Required Minimum Distribution publication on schwab.com.