A 5% LLC owner generally has no required minimum distribution (RMD) obligation from the LLC itself, because RMD rules apply to tax-advantaged retirement accounts, not to ordinary business equity. RMDs would begin only if that 5% membership interest sits inside an IRA, and then the start date depends on the account owner's birth year and the SECURE 2.0 rules. The ownership percentage is largely irrelevant to the trigger; the account type and the owner's age control it. Understanding why requires separating business ownership from retirement-account rules.
Most people who ask this question are mixing two different legal systems. An LLC is a state-law business entity with its own tax classification. An RMD is a federal tax rule for qualified retirement plans and IRAs. They interact only in specific structures, such as an IRA that holds an LLC interest. This explainer maps that interaction precisely, including the thresholds, edge cases, and mistakes that thin summaries skip.
The mechanism: why ordinary LLC equity never generates an RMD
An RMD is a minimum annual withdrawal from a tax-deferred retirement account once the owner reaches a statutory age. The rule exists because those accounts received tax deductions or tax-free growth, and Congress wants the deferred tax collected during the owner's lifetime. The governing statute is Internal Revenue Code section 401(a)(9), and the IRS enforces it through regulations and Publication 590-B.
An LLC membership interest is not a tax-deferred retirement account. It is an ownership stake in a business. Whether the LLC is taxed as a partnership, an S corporation, or a disregarded entity, the owner's tax obligation is to report allocated income annually, not to withdraw a minimum amount. A 5% owner of an operating LLC can hold that interest for decades with no RMD, because the LLC itself has no distribution mandate under federal retirement law.
This is the core answer, and it is the detail most 900-word explainers blur. The ownership percentage does not trigger anything. What matters is whether the LLC interest is held by, or is, a retirement account.
Quantified context: the actual RMD ages and percentages
When an LLC interest does sit inside an IRA, the RMD rules attach to the IRA, not to the LLC. The account owner's age and birth year set the start date. SECURE 2.0, enacted in 2022, changed the applicable age in stages.
People born in 1950 or earlier had an RMD age of 72. Those born from 1951 through 1959 reach their RMD age at 73. People born in 1960 or later reach it at 75. The first RMD for someone at age 73 is due by April 1 of the following year, and every subsequent RMD is due by December 31. Missing an RMD triggers an excise tax under section 4974, which SECURE 2.0 reduced from 50% to 25% of the shortfall, dropping to 10% if corrected promptly.
The distribution amount comes from dividing the prior December 31 account balance by a life expectancy factor from the IRS Uniform Lifetime Table. At age 73 the factor is 26.5, so a USD 1,000,000 IRA requires roughly USD 37,736 that year. At age 75 the factor is 24.6, so the same balance requires about USD 40,650.
For an illiquid LLC interest inside an IRA, this creates a real cash problem. The LLC may not distribute cash, but the IRA still owes the RMD. The owner must find liquidity elsewhere, or the shortfall is taxed.
Timeline: from LLC ownership to an RMD obligation
| Stage | What happens | RMD relevance |
|---|---|---|
| LLC formed | State filing creates the entity | None; business entity only |
| Tax classification chosen | Partnership, S corp, or disregarded | None; tax reporting only |
| Interest placed in an IRA | Account owns the membership units | RMD rules now attach to the IRA |
| Owner reaches applicable age | 73 or 75, depending on birth year | RMD obligation begins |
| First RMD year | Due by April 1 of the next year | First withdrawal required |
| Each later year | Due by December 31 | Annual withdrawal required |
| Shortfall occurs | Excise tax applies | 25%, or 10% if corrected |
The table shows the only path where a 5% owner has an RMD. The trigger is the IRA, and the clock starts at the statutory age, not at the moment of LLC ownership.
Edge cases: when the 5% figure actually matters
There are narrow situations where 5% ownership is legally significant, but they are not LLC RMD triggers. The most important is the 5% owner rule for required beginning dates in employer plans. Under IRC section 401(a)(9)(C), a 5% owner of the employer sponsoring a qualified plan must begin RMDs by April 1 of the year after the year they reach the applicable age, even if still employed. A non-5% employee who is still working can often defer RMDs from that employer's plan.
This is the counterintuitive detail. The 5% threshold exists, but it lives in the employer-plan rule, not the LLC rule. A 5% owner of an LLC that sponsors a 401(k) could be subject to the still-working deferral restriction. A 5% owner of an LLC with no retirement plan has no such issue.
Other edge cases include an LLC interest held by a self-directed IRA, where the IRA is the account and the LLC is an asset. The RMD is calculated on the IRA's total value, including the LLC interest, using a valuation. If the LLC interest is hard to value, the owner still must use a good-faith valuation, and the IRS can challenge it.
A Roth IRA owner has no lifetime RMDs, so a Roth holding an LLC interest creates no annual withdrawal requirement. Inherited accounts follow different rules under the SECURE Act and its regulations, and a 5% ownership stake does not change those beneficiary rules.
Misconceptions and red flags
Several common beliefs are wrong, and acting on them creates penalties.
"Five percent ownership triggers RMDs." False for the LLC itself; true only in the narrow employer-plan 5% owner rule. "The LLC must distribute cash for the RMD." False; the IRA owes the RMD regardless of LLC liquidity. "RMDs start at 70½." Outdated; the age is now 73 or 75 depending on birth year. "A Roth IRA has RMDs." False for the original owner during life. "Missing an RMD is a minor issue." False; the excise tax is 25%, or 10% if corrected promptly. "The ownership percentage sets the withdrawal amount." False; the account balance and life expectancy factor set it.
The liquidity mismatch is the red flag that deserves the most attention. An IRA holding a 5% LLC interest in a real estate or operating business may generate no cash, yet the RMD is mandatory. Owners sometimes take a distribution in kind, moving LLC units out of the IRA, which is permitted but creates valuation and tax-basis complications.
Practical actions and thresholds
The steps depend on which structure applies.
If the LLC interest is outside any retirement account, no RMD action is required. Confirm the tax classification and keep the operating agreement current. There is no age trigger and no annual withdrawal mandate from federal retirement law.
If the LLC interest sits inside a traditional IRA, confirm the owner's birth year to fix the RMD age at 73 or 75. Obtain a defensible year-end valuation of the LLC interest. Calculate the RMD using the Uniform Lifetime Table factor for that age. Ensure the IRA has enough liquid assets to satisfy the RMD, or plan an in-kind distribution. File the correct form and keep records.
If the owner is a 5% owner of a business sponsoring a qualified plan, apply the section 401(a)(9)(C) rule and start by the required beginning date even if still working. Coordinate with the plan administrator, because the still-working exception does not apply to 5% owners.
One threshold to reconcile explicitly: the 5% figure and the RMD age are separate tests. The 5% test governs the employer-plan deferral exception. The age test governs when RMDs begin. Passing one does not satisfy the other.
Limitations and what this cannot tell you
This explainer covers the federal framework and stable mechanisms. It cannot substitute for a review of a specific operating agreement, IRA custodian rules, or plan document. State law, the LLC's own distribution provisions, and the custodian's in-kind distribution policies can all change the practical outcome. Valuation of an LLC interest inside an IRA is fact-specific and can be disputed.
The rules also continue to shift. SECURE 2.0 changed ages and penalties, and Treasury regulations on inherited accounts have been revised. Confirm current IRS guidance before acting, because a summary of stable rules cannot capture every regulatory update.
This article is general educational information about tax and retirement rules, not a legal opinion, tax opinion, or investment recommendation. It does not promise any outcome or return. Consult a qualified tax professional or attorney about your specific LLC, IRA, and plan documents before making decisions.