A major selling point for retirement accounts like 401(k)s and traditional IRAs is that contributions are made pre-tax, reducing taxable income for the year. (Certain qualifications must be met for this to apply to a traditional IRA.)
The one downside is that although you can skip taxes on the front end when you make your contributions, you must pay taxes on the withdrawals you make from these accounts in retirement. To avoid a situation where someone skips taxes altogether by not making any withdrawals, the IRS has required minimum distributions (RMDs).
RMDs begin in the year that you turn 73. If you're wondering how much your RMD will be with $100,000 in your retirement account, it comes down to your age.
How your required minimum distribution is determined
The first step in determining your RMD is knowing your account balance at the end of the previous year. In this case, let's assume you ended 2024 with $100,000 in your account.
The next step is dividing this amount by your life expectancy factor (LEF), which the IRS sets based on your age. Below are the LEFs for ages 73 to 75:
| Age | Life Expectancy Factor |
|---|---|
| 73 | 26.5 |
| 74 | 25.5 |
| 75 | 24.6 |
Data source: IRS.
With $100,000 in your account, your RMDs for this year (rounded up to the nearest dollar) would be:
- Age 73: $3,774
- Age 74: $3,922
- Age 75: $4,066
You'll notice that your RMD increases as you age because your LEF decreases. This is to ensure that you gradually withdraw more of your savings as you age, aligning with the IRS's goal of ensuring that you deplete your account (and they receive their tax money).
If you don't make your RMDs for a given year, you'll be subject to a penalty of 25% of the amount you were supposed to withdraw, or 10% if you correct it within two years.
