There's plenty to like about retirement accounts like 401(k)s and traditional IRAs. Both types of accounts allow your contributions to reduce your current year's taxable income, giving you an immediate tax break that could save you hundreds or thousands of dollars.
The catch, however, is that you're not totally free from paying taxes; you pay on the back end in retirement.
In some cases, someone may not need the money in their 401(k) or traditional IRA and can survive in retirement on other sources, such as investments. To avoid a situation where someone skips paying taxes altogether, the IRS enacts required minimum distributions (RMDs), starting the year when you turn 73.
To get a sense of how much RMDs may be, let's examine a scenario where you have $100,000 in your retirement account(s).
Image source: Getty Images.
How the IRS determines your required minimum distribution
Your RMD is determined by your account value at the end of the previous year and your life expectancy factor (LEF). The first factor is straightforward, but the LEF may be a new concept to some.
The IRS provides LEFs for every age. Once you know your LEF, you can find your RMD by dividing your account value at the end of the previous year by this number.
In this scenario, we're assuming you had $100,000 in your account at the end of 2024. Based on that, here are the LEFs and RMDs for ages 73 to 80:
| Age | Life Expectancy Factor | Required Minimum Distribution for a $100,000 Account |
|---|---|---|
| 73 | 26.5 | $3,774 |
| 74 | 25.5 | $3,922 |
| 75 | 24.6 | $4,065 |
| 76 | 23.7 | $4,239 |
| 77 | 22.9 | $4,363 |
| 78 | 22.0 | $4,545 |
| 79 | 21.1 | $4,710 |
| 80 | 20.2 | $4,892 |
Data source: Social Security Administration. Required minimum distributions rounded up to the nearest dollar. Table by author.
The penalty for not taking your RMDs could be up to 25% of the amount you failed to withdraw.
If you take your RMD within two years of the missed deadline, the penalty drops to 10%.
