What it means
Tax-deferred retirement accounts, such as traditional individual retirement accounts and many employer plans, let savings grow without annual tax. The government does not allow that deferral to last forever, so it sets a date after which withdrawals become compulsory.
For an individual retirement account, the required beginning date is generally April 1 of the year after the owner reaches the age set by law for minimum distributions. For many employer plans it can be later, because the date may follow the year the employee actually retires, unless the employee owns a large stake in the sponsoring business.
The first withdrawal is allowed to wait until that April 1, which creates a trap. If the owner delays the first withdrawal for the first year, a second withdrawal for the next year is also due by December 31, so two taxable amounts land in one tax year and can push the owner into a higher tax bracket.
The yearly minimum is called the required minimum distribution. It is worked out by dividing the account balance at the end of the previous year by a life expectancy factor taken from tables published by the tax authority.
The ages and penalty rates in this area have been changed by legislation several times, so the current figures should always be checked with the tax authority or an adviser. The principle stays the same: the required beginning date marks where tax-deferred saving ends and mandatory taxable withdrawals begin.
Planning around the date is a mainstream part of retirement advice. Options include taking early withdrawals in low-income years, converting some savings to a Roth account (which has no lifetime minimums for the original owner), and directing withdrawals to charity where the rules permit.
In practice
Real-world examples.
Example
A retired engineer turns the minimum distribution age during the year. He takes his first withdrawal in December instead of waiting until April of the following year, so he avoids having two withdrawals taxed in the same year.
Example
A founder is still working at the company in which she owns a large stake, and her employer plan treats her differently from other staff. Her adviser checks the plan rules to see whether the required beginning date applies earlier than for an ordinary employee.
Example
A couple with an $800,000 traditional account and large charitable intentions plan qualified charitable transfers directly from the account. The transfers count toward the minimum, reduce taxable income and are timed to complete before December 31.
Formula
Calculation
Required minimum distribution = account balance at the previous December 31 / distribution period (life expectancy factor from the tax authority's table).
Suppose a retiree has an account worth $600,000 at the end of the previous year, and the table factor for her age is 25.0 for illustration. Her required minimum distribution = 600,000 / 25.0 = $24,000. If she withdraws only $15,000, the shortfall is 24,000 - 15,000 = $9,000, and that $9,000 is the amount on which the penalty tax would be charged.Case study
Seen in the real world.
Fernhill Retirement Advisers is an illustrative, fictional firm. A new client, a retired shop owner, arrived with a $1,200,000 traditional account and a plan to delay his first withdrawal to the last possible day.
The adviser showed him the effect. Delaying the first withdrawal to the following April would mean two distributions in one year, roughly $48,000 and $50,000 in this illustration, taxed together alongside his pension income.
He chose to withdraw the first amount in the year he reached the age, spreading the tax over two years. The illustrative lesson is that the required beginning date is not only a deadline but a planning decision with real tax consequences.
Watch out
Common mistakes.
- Assuming that the first withdrawal must be taken in the year of the birthday, when the first one can be delayed until April 1 of the next year.
- Forgetting that delaying the first withdrawal means a second one is due in the same calendar year, which can lift taxable income sharply.
- Treating all retirement accounts the same, when employer plans, individual accounts and Roth accounts each follow different rules.
Questions
People also ask.
Do Roth accounts have a required beginning date?
Roth accounts held by the original owner generally have no lifetime minimum distributions, though accounts inherited by beneficiaries have their own rules.
What happens if I miss the deadline?
The tax authority can charge an excise tax on the amount that should have been withdrawn, and relief may be available if the error is corrected promptly and a reasonable cause is shown.
Does the required beginning date change if the law changes?
Yes, Congress has changed the starting age more than once, so the date should be confirmed each year against current guidance.
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