Required Minimum Distributions (RMDs) are mandatory withdrawals that individuals must take from their retirement accounts once they reach a certain age. These rules are in place to ensure that people don't defer taxes on their retirement savings indefinitely. Below, we’ll walk through what RMDs are, the new rules surrounding them, and how to comply with these requirements.
1. What are Required Minimum Distributions (RMDs)?
An RMD is the minimum amount of money that you are required to withdraw annually from your traditional IRA, 401(k), 403(b), or other qualified retirement plans once you reach a certain age. These distributions are subject to income tax at your ordinary income tax rate.
The purpose of RMDs is to ensure that you eventually pay taxes on the funds that have been accumulating in tax-deferred retirement accounts.
2. What Are the New RMD Rules?
As of 2023, the IRS changed the rules governing RMDs. The most significant change is the increase in the age at which you must begin taking RMDs from 72 to 73 for individuals who reach age 73 after 2023 (or are born after 1959).
Additionally, the SECURE Act 2.0, which was passed in December 2022, further modified the rules to gradually raise the RMD starting age:
For individuals who turn 73 in 2023 or later: You must begin taking RMDs by April 1 of the year following the year you turn 73.
For individuals who turned 72 before 2023: You must continue taking RMDs beginning at age 72, as per the old rules.
3. How to Calculate Your RMD
The amount of your RMD is calculated using the IRS Uniform Lifetime Table, which takes into account your age and the balance in your retirement account. You use your account balance at the end of the previous year to calculate the RMD for the current year.
Formula:
RMD = Account Balance at the End of Previous Year ÷ Life Expectancy Factor (from IRS table)
Example: If your account balance is $500,000 at the end of the previous year and your life expectancy factor at age 73 is 27.4 (from the IRS table), your RMD would be:
$500,000 ÷ 27.4 = $18,248.18
This means you would need to withdraw at least $18,248.18 for the year.
4. When Do I Need to Take My RMD?
RMDs must be taken by December 31 of each year, starting in the year you reach the required age. However, if it’s your first RMD, you can delay it until April 1 of the following year. But keep in mind, if you delay your first RMD, you will need to take two RMDs in the second year (one for the year you turned 73, and one for the current year).
Important Points:
You must take the distribution before December 31 to avoid penalties.
The RMD can be withdrawn from any of your retirement accounts, but it must total the required amount across all accounts. You can’t take less from one account and more from another to meet the RMD.
5. What Happens if I Don’t Take My RMD?
Failure to take the required minimum distribution by the deadline can result in a penalty. The IRS imposes a 50% penalty on the amount that should have been withdrawn but wasn’t. For example, if your RMD is $10,000 and you don’t take it, you could face a penalty of $5,000.
To avoid this, make sure to:
Keep track of your RMD deadlines.
Consider automating your RMD withdrawals with your plan administrator.
6. Can I Take More Than the Minimum?
Yes! You are allowed to withdraw more than the minimum required amount if you need additional funds or if you prefer to deplete your retirement account more quickly. However, keep in mind that the extra withdrawals will be taxed as ordinary income, just like the RMD.
7. Do RMDs Apply to Roth IRAs?
Roth IRAs are not subject to RMDs during the account holder’s lifetime. This is one of the benefits of a Roth IRA—your money can continue to grow tax-free for as long as you want. However, if the account owner passes away and the beneficiary is required to take distributions, RMDs may apply to the inherited Roth IRA.
Note: RMDs do apply to Roth 401(k)s, though. So, if you have a Roth 401(k), you will need to take RMDs starting at age 73 (or 72 if you were born before 2023).
8. How Can I Avoid RMDs?
Some individuals look for ways to avoid RMDs, especially if they want their retirement savings to grow tax-deferred for a longer period. There are a few strategies:
Roth IRA Conversion: Converting your traditional IRA or 401(k) to a Roth IRA can help you avoid RMDs, as Roth IRAs are not subject to RMDs during your lifetime. However, you’ll have to pay taxes on the converted amount at the time of conversion.
Qualified Charitable Distributions (QCDs): If you’re 70½ or older, you can donate up to $100,000 directly from your IRA to a qualified charity without the distribution counting as taxable income. This can satisfy your RMD for the year.
Annuities: Some individuals use annuities that meet IRS requirements for RMDs, which can provide a guaranteed income stream. However, these come with specific rules and considerations, so it’s important to consult a financial advisor before going this route.
9. What If I Inherited a Retirement Account?
If you inherit a retirement account, the rules for RMDs depend on whether the account is a traditional IRA, Roth IRA, or other plan, and when the original account holder passed away. In general:
If the original account holder was 73 or older: You must take RMDs based on the IRS life expectancy table.
If you are a non-spouse beneficiary: You may need to withdraw all funds within 10 years of the original account holder’s death, depending on the account type and your relationship to the decedent.
10. Key Takeaways
RMDs are required from tax-deferred retirement accounts once you reach age 73, unless you're still working and have a 401(k) with your employer.
The amount of the RMD is based on the account balance at the end of the prior year and a life expectancy factor.
You must take the RMD by December 31, or face a hefty penalty.
Roth IRAs do not require RMDs during the account holder's lifetime, but Roth 401(k)s do.
There are ways to reduce or avoid RMDs, such as converting to a Roth IRA or using Qualified Charitable Distributions (QCDs).
Conclusion
Required Minimum Distributions (RMDs) are a crucial part of retirement planning, and understanding the new rules is important for compliance and maximizing tax advantages. If you have a retirement account, make sure to plan ahead for your RMDs to avoid penalties and ensure you’re managing your retirement savings efficiently. Consulting a tax advisor or financial planner can also help you develop a strategy that works for your financial situation.