The required minimum distribution (RMD) is the amount of money you’ll be required to withdraw from your account once you reach a certain age. For most retirees, this age will be somewhere between 70 and 73, regardless of whether you are actually retired.
In this guide, we’ll discuss how RMDs work, how to calculate them, and some of the most common questions people have about RMDs — including what they are and strategies for managing them. Taking the time to understand how RMDs actually work can help you avoid costly penalties during your retirement.
The required minimum distribution (RMD) is an annual government-mandated amount that you must withdraw from specific retirement plans and accounts at retirement age. The RMD typically applies to tax-deferred accounts where taxation is delayed, including:
Most individual retirement accounts (IRAs)
Employee-sponsored 401(k) plans
403(b) and 457(b) plans
Most small business accounts
Generally, RMDs do not apply to Roth IRAs, but can apply to inherited Roth IRAs.
RMDs are required by law. While retirees might consider them an inconvenience, the distributions help ensure that you pay taxes on all income generated, so that the government can pay its bills. Remember: the initial contributions and earnings generated in these accounts were tax deferred and not tax-exempt, and those benefits expire.
RMDs are taxable at ordinary income rates. Your final tax bill will depend on several factors, including the amount you withdraw and your tax bracket. However, if you don’t keep up with your required distributions, you may be subject to fines and additional taxes. FinanceHQ connects you with finance professionals that can help you evaluate your situation and keep your RMDs compliant.
In most cases, if you have a retirement account with funds that have not yet been taxed, you will need to withdraw an RMD. Types of tax-advantaged accounts that require RMDs include:
Traditional 401(k), 403(b), 457(b) plans
Inherited Roth IRA beneficiaries
Profit sharing plans
Other defined contribution plans
By contrast, Roth IRAs do not require RMDs because contributions are made with post-tax money. One exception to keep in mind — if an account owner passes away and the Roth IRA is inherited by a beneficiary, RMDs may apply.
The formula used for calculating an RMD is surprisingly simple. In order to calculate your RMD, all you need to know is the total value of your account on December 31st of the prior year and the distribution period that corresponds with your age.
You can use online calculators or financial software to calculate your RMD. However, be sure to double-check that you are working with the right numbers. Taking a lower distribution than legally mandated can result in financial penalties.
Once you’ve found these two numbers, you can then use the following formula:
For example, if you were 75 at the end of last year, then your distribution period is 24.6 years. If you have $1.2 million in your IRA, you can then use the RMD formula to calculate your minimum. Using the formula above:
RMD = $1,200,000 / 24.6 years
RMD = $48,780
This means you must withdraw $48,780 in order to satisfy the RMD.
The required minimum distribution in one year will almost never be the same as the RMD in the next year. It depends on your account balance, an IRS-determined distribution period, and the account ownership.
Life expectancy. The IRS regularly publishes a distribution period based on life expectancy data, which can be found in IRS Publication 590-B. Overall, this withdrawal schedule is designed to ensure withdrawals are divided somewhat evenly over the rest of your life. This means that when life expectancy increases, RMDs will decrease — and vice versa. The life expectancy table is published as an average of all Americans, so your personal life expectancy will not affect your RMD.
Account balance. You won’t be required to withdraw more than you have, but the IRS looks at a snapshot of your holdings to determine its value. Your withdrawals are based on the December 31st account value from the previous year.
Inherited IRAs. Beneficiary RMDs depend on the relationship between the beneficiary and account owner, whether the account owner died after 2019, and if RMDs had already begun.
Spousal beneficiaries. A spouse who is the primary account beneficiary and more than 10 years younger than the original owner can use the IRS Joint Life and Last Survivor Expectancy Table found on IRS Publication 590. The RMD calculation is the same but the life expectancy factor is determined by spousal ages.
The IRS publishes a “Uniform Lifetime Table” that details the required distribution period for retirement funds through RMDs. At minimum, you’ll need to have your retirement funds withdrawn by the end of the relevant time period.
If you’re wondering at what age do RMDs stop: within your lifetime, the latest it could end is calculated by adding the distribution period to the age. If you still have funds left to withdraw, you could be distributing RMDs past your 100th birthday! Here is the required minimum distribution table as of 2023:
You can take RMDs as annual lump sum payments or divide them into regular intervals like monthly or quarterly. Distributions in frequent intervals act as a regular income stream to pay for expenses. Many retirees choose to take year-end RMDs to maximize the time investments have to grow. The tax applicable on the RMD does not change depending on the frequency of withdrawals, though of course if you withdraw more than the minimum required, you may also owe more tax.
A common tax mitigation strategy is to convert traditional IRAs into Roth IRAs potentially before reaching retirement age, which eliminates the need to take distributions. However, the conversion itself will be subject to income tax. You can also make a qualified charitable distribution from a retirement account to reduce taxable income.
The strategy you choose usually depends on your current income tax bracket and the expected tax bracket at retirement. Calculating your RMD accurately remains an important step before choosing any strategy. A financial advisor can work with you to optimize your distribution for tax purposes and planning for your future. Consult with an expert through FinanceHQ today!
Following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, the rules governing RMDs have changed. Previously, all retirees who turned 70.5 in 2019 were required to begin taking their RMDs by 2020, and then the retirement age was extended to 72. Starting in 2023, your first RMD is required when you reach 73.
Your first RMD must occur before April 1st of the calendar year after you turn 73. For all other years, you’ll need to withdraw the RMD by the end of the year on December 31st. This means after age 73, you may withdraw two RMDs in one year.
The penalties for not taking an RMD can be very strict. While the fine will not be automatically applied, any account owner who fails to make their RMD can be subject to a 50% excise tax. This means that failing to withdraw a $50,000 RMD could cost you up to $25,000.
Avoid missing your RMD by calculating accurate amounts and distributing funds before the deadline. If you missed an RMD, you must report it to the IRS and pay the penalty.
Whether or not you've been saving enough for retirement, a financial advisor can help you accurately calculate your RMD and decide how often to take distributions. You may also benefit from expert tax advice to determine optimal strategies for converting retirement accounts to eliminate the RMD entirely. Increase the money you keep from retirement savings by working with a financial advisor matched by FinanceHQ.
Amanda brings 30 years of experience in banking and finance.