If you're new to required minimum distributions (RMDs), it's easy to get confused about what you're actually supposed to do. You don't want to withdraw too little because you'll pay a 25% tax penalty on the RMD you failed to withdraw. And withdrawing too much could raise your tax bill and cause you to miss out on valuable investment earnings.
The good news is, once you know a few basic rules, the whole RMD process starts to feel a lot easier. One of the most important things to understand is that you don't have to take RMDs from all your retirement accounts.
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Roth IRAs have always been exempt from RMDs because you fund them with after-tax dollars. The government doesn't take a cut of these distributions, so it has no reason to force you to take money out of these accounts in retirement. As of a few years ago, Roth 401(k)s also don't require RMDs.
You usually have to take RMDs from all tax-deferred retirement accounts, including traditional IRAs and 401(k)s. But there is an exception for your current 401(k) if you're still working and own less than 5% of the company. In that case, you can delay RMDs from that account only until the year after the year you retire.
You also don't have to take RMDs from every traditional IRA. But the total amount you withdraw from your IRAs must equal the total of all your IRA RMDs. So, if you had two traditional IRAs, you would calculate RMDs for each. If one was $5,000 and one was $1,000, you could take all $6,000 from one account, $3,000 from each, or any combination you like as long as total IRA withdrawals equaled or exceeded $6,000.
Consult with a tax professional if you have any questions about how RMDs work or how much you need to withdraw. Try not to put this off at the end of the year. Understanding the rules earlier gives you more time to figure out the best withdrawal strategy for you.
