One of the biggest appeals of accounts like 401(k)s and traditional IRAs is the up-front tax break, with the chance to lower your taxable income.
Unfortunately, this doesn't exempt you from taxes; it just delays them until you make withdrawals in retirement. And to ensure you'll eventually make those withdrawals, the IRS has required minimum distributions (RMDs).
RMDs begin in the year you turn 73, and the exact amount you're required to withdraw varies depending on your age and account balance. Here's how much your RMD could be if you have $750,000 in tax-deferred accounts.
Image source: Getty Images.
How the IRS determines your required minimum distribution
The first step is finding out your account balance at the end of the previous year. Then, look for the life expectancy factor (LEF) corresponding to your age and marital status, which the IRS provides.
To calculate your RMD, you divide your account value by your LEF. Below are examples for someone single with $750,000 in their retirement account as of the end of 2024:
| Age | Life Expectancy Factor | Required Minimum Distribution on $750,000 |
|---|---|---|
| 73 | 26.5 | $28,301 |
| 74 | 25.5 | $29,412 |
| 75 | 24.6 | $30,489 |
| 76 | 23.7 | $31,646 |
| 77 | 22.9 | $32,754 |
| 78 | 22.0 | $34,091 |
| 79 | 21.1 | $35,545 |
| 80 | 20.2 | $37,128 |
Data source: IRS. Table by author. RMDs rounded to the nearest dollar.
Unsurprisingly, failing to take your RMD has consequences. The IRS penalty is 25% of the amount you failed to withdraw, but if you correct your mistake and take your RMD within two years of the missed deadline, it could drop to 10%.
Continuing our example, if a 74-year-old only withdrew $19,412 instead of $29,412, the initial penalty would be $2,500 (25% of the remaining $10,000). However, if they withdrew the full amount within two years, the penalty would "only" be $1,000 (10% of $10,000).
In either case, the penalty is easily avoidable if you are aware of your RMD for the year and incorporate it into your budgeting and retirement planning.
