You probably think of the money in your retirement accounts as yours, but if you have traditional IRAs or 401(k)s, it's not that straightforward. You owe the IRS a cut of your savings, and at a certain point, it forces you to start taking required minimum distributions (RMDs). These are mandatory annual withdrawals that you must pay taxes on.
If you're new to RMDs, they can seem a little intimidating. Failing to withdraw the required amount results in a steep 25% tax penalty on the amount you should've withdrawn, so it's important to know how to calculate yours correctly. Let's look at the example of a retirement account with a $500,000 balance.
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Three situations where you don't have to take an RMD
You won't have to take an RMD from your retirement account if any of the following are true:
- You're under age 73: RMDs begin in the year you turn 73. If you turn 73 in 2025, you technically have until April 1, 2026 to take your first RMD. In all subsequent years, you must take RMDs no later than Dec. 31 of that year.
- It's a Roth account: You fund Roth accounts with after-tax dollars, so you can enjoy tax-free withdrawals in retirement. Because of this, the government has no incentive to force you to take money out each year.
- The account is associated with your current employer: If you're still working, you can delay RMDs from your current employer's retirement plan until the year after the year you retire. However, you still have to take RMDs from old 401(k)s and traditional IRAs,if you have any.
If none of these things apply to you, then you will need to take an RMD. Fortunately, they're not too difficult to calculate.
How to calculate your RMD on a $500,000 account
You calculate your RMD using the balance as of Dec. 31 of the previous year -- Dec. 31, 2024 for your 2025 RMD. If you don't know what your balance was at that time, you may need to look it up or speak to your plan administrator.
Once you know the amount, all you need to do is divide that by the distribution period next to your age in the IRS' Uniform Lifetime Table. The result is your RMD.
So, for example, if you had $500,000 in your 401(k) as of Dec. 31, 2024 and you turned 73 in 2025, your RMD would be $500,000 divided by 27.4 -- the distribution period for 73-year-olds. That comes out to about $18,248.
You're free to take out more than this if you'd like. But this is the minimum amount you must withdraw in order to avoid the 25% penalty.
What if you don't want to take your RMD?
Avoiding mandatory withdrawals generally isn't worth it. The 25% penalty will likely cost you more than what you would've paid in income taxes if you'd just taken the RMD as scheduled.
That said, sometimes you may not want to deal with the extra taxes an RMD can bring. In that case, consider making a qualifying charitable distribution (QCD). This is where you ask your plan administrator to send an amount equal to your RMD or a portion of it to a qualifying tax-exempt organization.
The money must go directly to the charity. If the plan administrator distributes it to you first, it does not count, even if you give it all away to charitable causes. Done properly, the IRS won't tax you on this retirement account withdrawal, and it'll consider your RMD satisfied for the year.
The maximum QCD you can make in 2025 is $108,000. This should be more than enough for most people.
You may have already spent an amount equal to your RMD on living expenses this year. In that case, you're in the clear until next year. Check with your plan administrator if you're unsure how much you've already withdrawn from your accounts in 2025. If you come up a little short, be sure to make some more withdrawals in the next few weeks.
