Income and Assets · Retirement income

Required minimum distributions and excess accumulations

The required minimum distribution is a rule about timing, not about tax rates: nothing here changes what a distribution costs, only when it must be taken. The penalty for missing it, however, is an excise tax on the taxpayer personally, and the mistake that produces it is almost never arithmetic. It is pooling — taking one large distribution from one account and assuming it covered everything.

The rule

A retirement account cannot be held indefinitely. A qualified trust must provide that the entire interest of each employee will be distributed by the required beginning date, or beginning by that date over the life or life expectancy of the employee and a designated beneficiary (IRC § 401(a)(9)(A)(i), (ii)). Rules similar to § 401(a)(9) apply to individual retirement accounts and annuities by force of IRC § 408(a)(6) and (b)(3).

The required beginning date turns on an “applicable age”. It is April 1 of the calendar year following the later of the year the employee attains the applicable age or the year the employee retires (IRC § 401(a)(9)(C)(i)). The retirement leg is withdrawn from a 5-percent owner (§ 401(a)(9)(C)(ii)(I)) and withdrawn entirely for purposes of § 408(a)(6) or (b)(3) (§ 401(a)(9)(C)(ii)(II)) — so an IRA owner never gets to defer by continuing to work, and the regulation makes the point by directing that an IRA owner’s required beginning date is determined using the rules for 5-percent owners (Reg. § 1.408-8(b)(1)(i)). The applicable age itself is set by a two-line schedule in § 401(a)(9)(C)(v).

The amount is a quotient. For an individual account, the minimum for each distribution calendar year is the account balance divided by the applicable denominator (Reg. § 1.401(a)(9)-5(a)(1)). The balance is the balance as of the last valuation date in the preceding calendar year — for an IRA, 31 December of the preceding year, with no adjustment for later contributions or distributions (Reg. § 1.408-8(b)(2)). The denominator during life comes from the Uniform Lifetime Table for the owner’s age on their birthday in the distribution year (Reg. § 1.401(a)(9)-5(c)(1)), unless the sole beneficiary at all times during the year is a spouse more than ten years younger, in which case the joint and last survivor denominator is used instead (Reg. § 1.401(a)(9)-5(c)(2)(i), (ii)).

The first year, and only the first, may be deferred. The distribution for the first distribution calendar year may be made on or before April 1 of the following year; every other year’s must be made by the end of that year (Reg. § 1.401(a)(9)-5(a)(3)). Deferring therefore stacks two distributions into the second year — and the second is computed on a balance that has not been reduced by the first.

A required minimum distributionrequired minimum distributionThe minimum amount that must be withdrawn each year from most retirement accounts starting at a certain age, whether or not the owner actually needs the money. is not eligible for rolloverrolloverMoving retirement funds from one eligible account to another without triggering current tax, as long as the move follows the rules for timing and eligible accounts.. IRC § 408(d)(3)(E) denies rollover treatment to any amount required to be distributed, and the first dollars distributed in a year for which one is due are treated as the required amount until it is satisfied (Reg. § 1.408-8(b)(3)). That is why a required distribution can never be converted to a Roth IRA.

Roth accounts are outside the lifetime rule. Notwithstanding § 408(a)(6) and (b)(3), § 401(a)(9)(A) and the incidental death benefit requirements do not apply to a Roth IRA (IRC § 408A(c)(4)); § 402A(d)(5) now says the same for a designated Roth account in an employer plan. Both provisions are confined to the owner’s lifetime — after death the rules apply, and Reg. § 1.408-8(b)(1)(ii) treats a Roth IRA owner as having died before their required beginning date.

Which accounts may be pooled is the operative rule. The required distribution is calculated separately for each IRA, and the sum may then be taken from any one or more of them (Reg. § 1.408-8(e)(1)(i)). Only IRAs the individual holds as owner aggregate; inherited IRAs aggregate with each other but only per decedent, and never with the beneficiary’s own (Reg. § 1.408-8(e)(2)). Non-Roth IRAs, Roth IRAs and § 403(b) contracts form three closed groups that cannot satisfy each other (Reg. § 1.408-8(e)(3)). Employer plans under § 401(a) are not in this regime at all: each plan must pay its own.

The excise tax. Where the amount distributed during the taxable year is less than the minimum required distribution, a tax on the shortfall is imposed and is paid by the payee (IRC § 4974(a)). A lower rate applies where, within the correction window, the payee both receives a distribution of the shortfall from the same plan and submits a return reflecting the tax (§ 4974(e)(1), (2)). Separately, the Secretary may waive the tax where the taxpayer establishes that the shortfall was due to reasonable error and that reasonable steps are being taken to remedy it (§ 4974(d)). The rates and the window are in the table below.

Current figures

How it works in practice

Work the computation account by account, then decide where to take the money from. For each IRA, take the 31 December balance of the prior year and divide by the denominator for the owner’s age this year. Add the results. That total may come out of any IRA, or several, in any proportion — the aggregate is what matters. Then check for anything outside the IRA group: a former employer’s 401(k) that was never rolled over pays its own, and a § 403(b) contract pools only with other § 403(b) contracts.

The tax is reported on Form 5329, Part IX. Where relief is sought under § 4974(d), the instructions direct the taxpayer to enter “RC” and the amount of the shortfall being waived on the dotted line, reduce the reported shortfall accordingly, and attach a statement of explanation. This is a request, not an election — the IRS decides. The reduced rate under § 4974(e), by contrast, is not discretionary: it applies if the two conditions are met.

A distribution is due for the calendar year of the owner’s death, and to the extent it was not distributed to the owner it must be distributed during that year to the beneficiarybeneficiaryThe person or entity entitled to receive money or property from a trust, estate, retirement account, or insurance policy. (Reg. § 1.401(a)(9)-5(c)(1)). Everything after that year is governed by a different set of rules.

How this has changed

The age has moved twice in four years and is scheduled to move again. IRC § 401(a)(9)(C)(v) now carries the applicable age as a two-clause schedule rather than a number: 73 for an individual attaining age 72 after 2022 and age 73 before 2033, and 75 for an individual attaining age 74 after 2032. The statute elsewhere still refers to age 70½ — § 401(a)(9)(C)(iii), the actuarial-increase rule — because that provision was never conformed. Any material written against “age 70½” or “age 72” is describing a prior schedule, and material that gives a single number for the current one is describing only half of the present rule.

The excise tax was halved and made correctable. Pub. L. 117-328 § 302(a) and (b) cut the long-standing rate by half and added subsection (e), the reduced rate and the correction window. The § 4974(d) reasonable-error waiver predates both and is unchanged; it is now one of two routes rather than the only one, which materially changes the advice in a missed-distribution case.

Designated Roth accounts left the lifetime regime. IRC § 402A(d)(5) now disapplies § 401(a)(9)(A) to a designated Roth account notwithstanding §§ 403(b)(10) and 457(d)(2). Before that amendment, a Roth 401(k) was subject to lifetime required distributions while a Roth IRA was not, and rolling the plan balance to a Roth IRA was the standard fix. That planning step is no longer necessary for this reason, though it may still be desirable for others.

The regulations were rewritten. The current Treas. Reg. §§ 1.401(a)(9)-1 through -9 and § 1.408-8 replaced the 2002 regulations, and the language changed with them: what practitioners called the “applicable distribution period” or “life expectancy factor” is now the applicable denominator, and the aggregation rules that used to sit in a question-and-answer format at § 1.408-8 A-9 are now at § 1.408-8(e). Citations to the Q&A numbering no longer resolve.

Exam focus

Expect a computation with more than one account type, because that is where the rule bites. Sort the accounts into groups first — IRAs as owner, IRAs as beneficiary of one decedent, § 403(b) contracts, each § 401(a) plan separately — and only then divide.

Expect the applicable age to be tested as a date rather than a number: given a birth year, identify the required beginning date. Watch for the 5-percent owner and for the fact that the still-working deferral never applies to an IRA.

Expect both excise-tax rates together with the reasonable-error waiver. A question describing a taxpayer who discovers the shortfall and immediately withdraws it is pointing at § 4974(e)(1); one that describes a custodian’s error and a corrected distribution is pointing at § 4974(d).

Do not confuse this excise tax with the additional tax on early distributions. They sit at opposite ends of the same account’s life, and only this one is measured by a shortfall.

Check yourself

1. A taxpayer holds two traditional IRAs and one § 403(b) contract, all subject to required distributions. May a single withdrawal from the larger IRA satisfy all three?

Answer: No. It satisfies both IRAs, because Reg. § 1.408-8(e)(1)(i) permits the aggregate IRA amount to come from any one of them, but Reg. § 1.408-8(e)(3) forbids a distribution from a non-Roth IRA from satisfying a § 403(b) contract.

2. An IRA owner’s required minimum distribution for 2026 is 20,000 dollars and she withdraws 12,000 dollars. What is the excise tax, and how might it be reduced?

Answer: 25 percent of the 8,000-dollar shortfall, so 2,000 dollars, under IRC § 4974(a). Distributing the 8,000 dollars from the same plan and filing a return reflecting the tax within the correction window substitutes the 10 percent rate under § 4974(e)(1); a waiver may also be requested under § 4974(d).

3. A 78-year-old with a Roth IRA and a traditional IRA asks whether the Roth balance is included in the computation. Is it?

Answer: No. IRC § 408A(c)(4) disapplies § 401(a)(9)(A) to a Roth IRA during the owner’s lifetime, and Reg. § 1.408-8(e)(3) keeps Roth IRAs out of the non-Roth IRA aggregation group in both directions.

4. May a taxpayer who is due a required minimum distribution convert the whole IRA to a Roth IRA and count the conversion as satisfying it?

Answer: No, on both halves. IRC § 408(d)(3)(E) denies rollover treatment to a required amount, so it cannot be converted, and Reg. § 1.408-8(b)(3) treats the first dollars distributed in the year as the required amount — which must be taken in cash before anything is converted.

5. Why does deferring the first year’s distribution to 1 April often cost more than it saves?

Answer: Because only the first distribution calendar year may be deferred (Reg. § 1.401(a)(9)-5(a)(3)). The second year’s amount is still due by 31 December of that year and is computed on the prior 31 December balance, which the deferred distribution did not reduce — so two amounts fall in one year.