Key Takeaways
- Annual withdrawals start at age 73.
- RMD = prior year balance ÷ IRS life expectancy.
- Missed RMDs incur up to 25% excise tax.
- Roth IRAs have no lifetime RMDs.
What is Required Minimum Distribution (RMD)?
Required Minimum Distribution (RMD) is the minimum amount you must withdraw annually from certain tax-deferred retirement accounts once you reach age 73. These withdrawals, mandated by the IRS, ensure that funds in accounts like traditional IRAs and 401(k)s are eventually taxed.
The RMD rules apply to accounts such as traditional IRAs, including those established via a backdoor Roth IRA conversion, and are designed to prevent indefinite tax deferral.
Key Characteristics
Understanding the core features of RMDs helps you stay compliant and optimize retirement withdrawals.
- Starting age: You must begin taking RMDs at age 73, with the first distribution due by April 1 of the year following your 73rd birthday.
- Account types: Applies to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and 457(b) plans, but not Roth IRAs during your lifetime.
- Calculation: RMD amounts are based on your account balance as of December 31 of the prior year and your life expectancy factor from IRS tables.
- Penalty for non-compliance: Failing to withdraw the full RMD may result in a 25% excise tax on the shortfall, reduced to 10% if corrected timely.
- Aggregation rules: You can combine RMDs from multiple IRAs or 403(b)s but must calculate and withdraw separately from each 401(k) plan.
How It Works
Each year, your RMD is determined by dividing the previous year’s December 31 account balance by a life expectancy factor from IRS tables. These factors decrease as you age, increasing your required withdrawal.
For example, you would use the Uniform Lifetime Table unless your spouse is the sole beneficiary and more than 10 years younger, in which case a joint life expectancy table applies. Custodians often provide the RMD calculation or tools, reducing the chance of errors.
Examples and Use Cases
RMDs vary depending on age, account type, and individual circumstances. Here are some practical examples:
- Age 73, single IRA: With a $100,000 balance and a life expectancy factor of 26.5, your RMD equals approximately $3,773.58.
- Age 80, IRA owner: Using a factor of 20.2 on a $100,000 balance, the RMD is about $4,950.50.
- Investment allocation: If you hold shares of Schwab U.S. Broad Market ETF or iShares S&P 500 ETF, you can withdraw the RMD in cash or in-kind securities, depending on plan rules.
- Employer plans: For separate 401(k) accounts, you must calculate and withdraw RMDs individually, unlike IRAs which allow aggregation.
Important Considerations
Failure to take RMDs can lead to costly penalties, so it’s critical to plan your withdrawals carefully. You may also consider strategies like investing in a QLAC to defer RMDs on a portion of your account balance.
Market fluctuations affect your account balance and thus your RMD amount annually, similar to how the rate of return impacts your investments. Consulting with financial professionals or using resources from Vanguard Total Bond Market ETF can help manage tax-efficient withdrawals.
Final Words
Required Minimum Distributions ensure taxes are collected on tax-deferred retirement savings starting at age 73, with strict deadlines and penalties for shortfalls. Review your account balances annually to calculate accurate RMDs and consult a financial professional to avoid costly mistakes.
Frequently Asked Questions
Required Minimum Distribution (RMD) is the minimum amount you must withdraw annually from certain retirement accounts starting at age 73 to ensure that tax-deferred savings are eventually taxed.
You must start taking RMDs by April 1 of the year after you turn 73. After that, RMDs are due by December 31 each year.
Your RMD is calculated by dividing your account balance as of December 31 of the prior year by a life expectancy factor from IRS tables, usually the Uniform Lifetime Table based on your age.
You can add up RMDs from multiple IRAs or 403(b) plans and withdraw the total from one or more of those accounts. However, RMDs from 401(k)s, 457(b)s, or other defined contribution plans must be calculated and withdrawn separately.
If you fail to withdraw the full RMD, you may owe a 25% excise tax on the amount not withdrawn, which can be reduced to 10% if corrected within two years.
Roth IRAs do not require lifetime RMDs for the original account owner, but beneficiaries who inherit Roth IRAs may have to take RMDs.
RMD withdrawals can be taken in cash by selling assets or in-kind by transferring assets, depending on the rules of your retirement plan and custodian.
Yes, if your spouse is the sole beneficiary and more than 10 years younger, you can use the IRS Joint Life and Last Survivor Expectancy Table, which generally results in a longer life expectancy factor and potentially smaller RMDs.
