Required Minimum Distributions (RMDs)

What is an RMD?

RMDs are mandatory retirement account withdrawals that take effect well after the average retirement age. You’ll need to take your first RMDs from pretax retirement accounts by April 1 of the year after you turn 73 (under the Secure Act 2.0, the RMD age will increase to 75 in 2033). From then on, you’ll need to take all future RMDs by Dec. 31 each year going forward.

For example, say you turn 73 in 2026. You'll need to take your first RMD by April 1, 2027, and you’ll need to take your next RMD by Dec. 31, 2027. Your deadline for RMDs in subsequent years will be Dec. 31.

The amount you’d need to take out from your account -- so that it’s taxed as ordinary income -- is based on your life expectancy. The IRS provides a table from which you can calculate your current year’s RMD using your account balance at the end of the previous calendar year. Make sure you’re using the most recently updated table before withdrawing any money.

RMDs by account

Here are some of the more common accounts that have RMD mandates:

• 401(k)s or 403(b)s: Assuming you have a pretax retirement account, you’ll be required to remove a certain percentage of your employer-sponsored plan every year after you turn 73. As of 2024, Roth-designated accounts no longer have RMDs.
• Inherited IRAs: Pretax retirement accounts left to you by deceased loved ones also come with required annual distributions. You’ll likely roll the account into an inherited IRA, which has a complex set of rules for distribution based upon your relationship to the original owner. Inherited IRAs have become even more complicated to manage since the passage of the Secure Act. Consult with a qualified tax advisor to understand your specific situation.
• Traditional IRAs: Traditional IRAs are also subject to RMDs once you reach age 73. Roth IRAs aren't, since these accounts contain money that has already been taxed.

For certain accounts, such as IRAs, your total RMD amount is the aggregate of all RMDs for all pretax retirement accounts. You could withdraw the entire amount from a single account, although this may be difficult to track if your accounts are spread across multiple brokerages. With inherited IRAs, you can withdraw the entire RMD from a single account as long as you've inherited the IRAs from the same person.

How to calculate your RMD

RMDs are based on your account balance at the end of the preceding year and your distribution factor. Your distribution factor is your life expectancy, according to the IRS.

You can find your distribution factor on the IRS website. Publication 590-B has tables with distribution factors based on age.

To calculate your RMD, divide your account balance by your distribution factor. Let's say your 401(k) has $200,000, and your distribution factor is 26.5. You would divide $200,000 by 26.5 to arrive at $7,547, which is the minimum amount you need to withdraw.

Alternatively, there are RMD calculators online that do the math for you.

RMDs and tax planning

RMDs are taxed at your highest ordinary tax rate upon withdrawal. There isn’t any special tax treatment for RMDs -- unlike with dividends or capital gains -- so you’ll need to be extra careful in planning around RMDs.

Taking the required minimum distribution is mandatory and unavoidable. You may want to withdraw even more if you’re in an otherwise low-income year. Purposely liquidating big portions of your pretax retirement savings can be a tax-saving move if you don’t have enough total income to “fill up” the lower tax brackets.

On the flip side, if you’re a high-income earner (whether active or passive), it’s possible that taking too much from pretax retirement accounts can push your income into a higher tax bracket. Having too much income in retirement can also lead to greater taxation of Social Security, as well as increased Medicare premiums.

RMDs and penalties

If you fail to take your RMD on time, you'll be liable for a 25% penalty. The penalty drops to 10% for IRA owners who fail to take an RMD but correct their mistake in a timely manner.

This penalty would be levied in addition to the taxes you’ll owe on the missed RMD. Depending on your total tax picture, you may also owe interest. In other words, failing to take your RMD has major consequences.

Following the earlier example, failure to withdraw $7,547 in the first year you were responsible for RMDs would result in a penalty of up to $1,887.

It’s truly in your best interest to take all RMDs when they’re due and to consider them as a fixed piece of your tax planning process.

Managing RMDs

RMDs are unavoidable, although you can manage around them if you’re diligent with your tax planning. Careful tax projections can help you determine if it’s a good year to withdraw more than your RMD amount, or if it’s better to simply take the minimum distribution.

The most important aspect of RMDs is that you take them when it’s time. Failure to do so can result in very costly penalties that can have the effect of undoing a portion of your retirement savings. For any saver, this is something worth avoiding.

As with any financial decision, you’ll need to consider your entire financial picture before making a planning decision involving RMDs. If you devote a small amount of time to learning, you’ll have a solid handle on RMDs and how to work with them in the future.