Required Minimum Distributions (RMDs)
| Rule | Detail |
|---|---|
| RMD Starting Age | Age 73 (SECURE 2.0, effective 2023); increases to age 75 in 2033 |
| First RMD deadline | April 1 of the year following the year you turn 73 |
| Subsequent RMDs | December 31 each year |
| Penalty for missed RMD | 25% of the amount not taken (reduced from 50% by SECURE 2.0); reduced to 10% if corrected timely |
| Calculation | Prior year-end account balance ÷ IRS Uniform Lifetime Table factor |
Exam Tip: Roth IRAs have NO RMDs during the original owner's lifetime. Roth 401(k)s post-SECURE 2.0 also have no RMDs during the owner's lifetime (effective 2024). Designated Roth accounts no longer require RMDs.
Still-Working Exception
If a participant is still working at age 73 and is NOT a 5% or more owner of the company, they can delay RMDs from their current employer's plan until retirement. IRAs do not get this exception — IRA RMDs start at 73 regardless.
Early Withdrawal Penalty Exceptions (10% Penalty)
The 10% additional tax on distributions before age 59½ does NOT apply if:
| Exception | IRA? | Employer Plans (401k, etc.)? |
|---|---|---|
| Death | Yes | Yes |
| Disability (total and permanent) | Yes | Yes |
| SEPP / 72(t) payments (substantially equal periodic payments) | Yes | Yes |
| Medical expenses exceeding 7.5% of AGI | Yes | Yes |
| Health insurance premiums while unemployed | Yes (IRA only) | No |
| Higher education expenses | Yes (IRA only) | No |
| First-time homebuyer ($10,000 lifetime) | Yes (IRA only) | No |
| Birth or adoption (up to $5,000) | Yes | Yes |
| Separation from service at age 55 or older | No | Yes (employer plan only) |
| QDRO (qualified domestic relations order) | No | Yes (employer plan only) |
Memory Trick: IRA-only exceptions = things you do on your own (buy a house, pay tuition, pay health insurance while unemployed). Employer plan exceptions = workplace events (leaving at 55, QDRO for divorce).
Roth IRA Rules
5-Year Rule for Earnings
- Roth IRA earnings are tax and penalty free only if:
- The distribution occurs at least 5 years after the first Roth IRA was funded (the 5-year clock starts January 1 of the tax year of the first contribution, even if made on April 15), AND
- The owner is age 59½ or older (or meets another qualifying exception).
- Roth contributions can always be withdrawn tax and penalty free at any time — only earnings are restricted.
- Ordering rules: contributions come out first, then conversions (in order of conversion year), then earnings.
Roth Conversion
- Amount converted is included in gross income in the year of conversion (no 10% penalty if converted to Roth; penalty may apply if withdrawn within 5 years of conversion before age 59½).
- Each Roth conversion starts its own 5-year clock for penalty purposes.
Traditional IRA Basis and Form 8606
- Nondeductible IRA contributions create basis in the IRA. This basis is tracked on Form 8606.
- Pro-rata rule: When you have both pre-tax and after-tax (basis) amounts in traditional IRAs, you cannot selectively withdraw just the basis. Every distribution is a pro-rata blend of pre-tax and after-tax dollars.
Example: Total traditional IRA balance = $100,000. Basis = $20,000 (nondeductible contributions). Basis ratio = 20%. Every $1 withdrawn = $0.80 taxable + $0.20 tax-free. You cannot withdraw the $20,000 basis first.
The pro-rata rule aggregates ALL traditional, SEP, and SIMPLE IRA accounts — you cannot isolate basis in one account.
NUA — Net Unrealized Appreciation
- NUA is a strategy for employer stock held inside a qualified plan (401k, ESOP).
- In a lump-sum distribution, the employee takes the employer stock in-kind (not rolling it to an IRA).
- Tax treatment:
- The plan's cost basis in the stock (what the plan paid) = taxable as ordinary income in the year of distribution.
- The NUA (appreciation from cost basis to FMV at distribution) = taxed at long-term capital gains rates when the stock is eventually sold, regardless of how long you hold it after distribution.
- Any additional appreciation after distribution = taxed at short-term or long-term capital gain rates depending on holding period.
When NUA beats a rollover: NUA is most advantageous when the stock has a low plan cost basis (large NUA), the participant is in a high ordinary income bracket (rollover distributions would be taxed at high rates), and LTCG rates are significantly lower than the marginal ordinary rate.