Understanding Required Minimum Distributions: The Basics
A Required Minimum Distribution, commonly called an RMD, is an amount of money that the federal government requires you to withdraw from certain retirement accounts each year once you reach a specific age. This requirement exists because these retirement accounts receive tax benefits during your working years, and the government wants to collect taxes on that money eventually.
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The RMD rules apply to traditional Individual Retirement Accounts (IRAs), Simplified Employee Pension IRAs (SEP-IRAs), Savings Incentive Match Plans for Employees IRAs (SIMPLE IRAs), and most employer-sponsored retirement plans like 401(k)s, 403(b)s, and 457 plans. However, Roth IRAs have different rules during the account owner's lifetime—you generally do not need to take RMDs from a Roth IRA while you are living, though this changed somewhat for beneficiaries after 2019.
The age at which RMDs begin has changed in recent years. Previously, RMDs started at age 70½. However, as of 2023, the age increased to 73 years old due to changes in federal law. This means if you turned 73 in 2023, you would need to take your first RMD by December 31, 2023. If you turn 73 in 2024, your first RMD would be due by December 31, 2024. The law continues to phase in higher ages for younger people, eventually reaching age 75 for those born in 1960 or later.
The IRS calculates your RMD amount using a formula that divides your account balance as of December 31 of the prior year by a life expectancy factor published in IRS tables. This means your RMD amount changes every year because both your account balance and your age factor change. For example, if your IRA balance was $500,000 on December 31, 2023, and you were 73 years old, the IRS would divide that amount by the life expectancy factor for age 73 to determine how much you must withdraw in 2024.
Practical Takeaway: Know your account type and current age. Traditional IRAs, SEP-IRAs, and most workplace retirement plans require RMDs, while Roth IRAs generally do not during your lifetime. If you are approaching age 73, begin gathering your account statements and balance information to prepare for your first withdrawal.
How the RMD Amount Is Calculated
Calculating your RMD requires three pieces of information: your account balance as of December 31 of the previous year, your age on December 31 of the current year, and the correct IRS life expectancy table. The IRS publishes three different tables—the Uniform Lifetime Table, the Single Life Expectancy Table, and the Joint Life and Last Survivor Expectancy Table. Most people use the Uniform Lifetime Table, which assumes a standard life expectancy factor based on age.
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Here is how the calculation works in practice. Suppose you are 75 years old and your traditional IRA balance on December 31, 2023 was $400,000. According to the Uniform Lifetime Table, the life expectancy factor for age 75 is 24.6. You would divide $400,000 by 24.6, which equals approximately $16,260. This means your RMD for 2024 would be approximately $16,260.
If you have multiple retirement accounts of the same type—for example, several traditional IRAs—you must add up all the account balances to calculate a combined RMD. You can then withdraw that total amount from any one account or split the withdrawal among accounts however you choose. However, this aggregation rule only applies to IRAs. If you have multiple 401(k)s or 403(b)s from different employers, you must calculate the RMD separately for each account and withdraw from each one individually.
The IRS provides worksheets and tables to help with calculations, and you can find these in Publication 590-B on the IRS website. Financial institutions that hold your retirement accounts also typically calculate your RMD for you and may send you a notice showing the amount you need to withdraw. However, the responsibility for taking the correct RMD ultimately rests with you, not the financial institution.
Life expectancy factors decrease each year as you age, which means your RMD typically increases over time. For instance, the factor at age 73 is 26.5, but at age 85 it drops to 18.2. This is intentional—the IRS expects you to withdraw a larger percentage of your account as you grow older, assuming you have fewer years left to live.
Practical Takeaway: Start with your account balance from December 31 of the prior year and the IRS Uniform Lifetime Table (found in IRS Publication 590-B). Divide your balance by the life expectancy factor for your age. If your financial institution provides a calculated RMD amount, verify it matches this formula or ask them to explain any differences.
RMD Tax Implications and Withholding Options
RMD withdrawals are taxed as ordinary income in the year you receive them. This means the money you withdraw from a traditional IRA or traditional 401(k) is added to your total income for the year and taxed at your regular income tax rate. If you fall into the 22% federal tax bracket, roughly 22% of your RMD will go to federal income taxes. If you are in a higher bracket, a larger portion goes to taxes. This can significantly affect your annual tax bill, especially if your RMD is large.
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You have choices about how taxes are handled on your RMD. One option is to have your financial institution withhold taxes directly from your withdrawal. For example, if you need to withdraw $20,000 and you request 20% withholding, the institution sends you $16,000 and holds back $4,000 for taxes. This money goes directly to the IRS on your behalf. Withholding removes the burden of paying taxes in a lump sum later and helps you avoid underpayment penalties.
Another option is to receive the full RMD amount without withholding and pay taxes yourself when you file your annual tax return. This approach works if you have other income sources that generate tax payments or if you plan to pay quarterly estimated taxes. However, if you do not pay enough tax throughout the year, you may owe a penalty for underpayment.
Some people use their RMD to fund charitable donations. If you are age 70½ or older, you can direct your IRA custodian to transfer up to $100,000 per year directly from your IRA to a qualified charity. This distribution counts toward your RMD but does not appear as taxable income on your tax return. This is called a Qualified Charitable Distribution (QCD), and it is a valuable tax strategy for those who give to charity.
State income taxes may also apply to your RMD, depending on where you live. Some states do not tax retirement income, while others tax it at full rates. You should verify your state's rules and request appropriate state withholding if needed.
Practical Takeaway: Contact your account custodian and ask about withholding options. Determine what percentage of your RMD should be withheld for federal taxes based on your overall tax situation. If you donate to charity, ask whether your IRA custodian offers Qualified Charitable Distributions, which can reduce your taxable income.
Penalties for Missing or Incomplete RMDs
Failing to take your RMD by the deadline or taking less than the required amount results in a substantial penalty from the IRS. For many years, the penalty was 50% of the amount not withdrawn. This meant if you were supposed to withdraw $10,000 and withdrew nothing, you owed a $5,000 penalty on top of the $10,000 in taxes owed. The penalty was considered one of the harshest in the tax code.
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Beginning in 2023, the penalty was reduced to 25% for most missed RMDs. If you correct the failure within two years, the penalty may drop to 10%. This is a significant change from prior law, though it still represents a substantial financial consequence. For example, if your RMD was $20,000 and you missed the withdrawal entirely, you would