Introduction
The Required Minimum Distribution (RMD) is a federal tax rule that mandates withdrawals from specific retirement accounts once account owners reach a certain age. Currently, this age is 73 for most people, as updated by recent IRS regulations. RMDs ensure that funds in tax-deferred retirement plans are eventually taken out and included in taxable income, preventing assets from accumulating tax-free indefinitely.
Background and Purpose of RMDs
Introduced in the early 1970s, RMD rules balance the government’s offer of tax breaks on retirement accounts with the requirement to pay taxes eventually. While accounts such as traditional IRAs, 401(k)s, SEP IRAs, and SIMPLE IRAs offer tax-deferral on earnings and contributions, the IRS needs a mechanism to collect taxes on those funds when distributed. RMDs serve this purpose by forcing minimum annual withdrawals after a certain age.
When Must You Start Taking RMDs?
Starting in 2023, the age for required beginning of RMDs is 73 for individuals born between 1951 and 1959. If you were born in 1960 or later, the age rises to 75. The first RMD can be delayed until April 1 of the year following the year you turn 73 (or your applicable age), but subsequent RMDs are required by December 31 annually.
Accounts Subject to RMD Rules
- Traditional IRAs (Learn more about Traditional IRAs)
- SEP IRAs
- SIMPLE IRAs
- Employer-sponsored plans like 401(k), 403(b), and 457(b) plans
Note: Roth IRAs do not require RMDs during the original owner’s lifetime.
Inherited retirement accounts have separate RMD rules, generally requiring distributions over the life expectancy of the beneficiary or within 10 years depending on the circumstances.
How Is the RMD Amount Calculated?
The IRS provides life expectancy tables used to calculate RMD amounts yearly. The general formula is:
RMD = Account balance as of December 31 (prior year) ÷ IRS life expectancy factor
- The account balance is the total value of the retirement account at the end of the prior calendar year.
- The life expectancy factor is based on IRS Uniform Lifetime Tables for account owners.
For example, if you turn 73 this year and your traditional IRA was worth $500,000 on December 31 last year, and your life expectancy factor is 27.4 from the IRS table, your RMD is $500,000 ÷ 27.4 = $18,248. This is the minimum amount you must withdraw by December 31 of the current year.
Tax Treatment of RMDs
Amounts withdrawn as RMDs from traditional retirement accounts are generally taxed as ordinary income at your current tax rate. This includes the principal and any earnings on contributions that were previously tax-deferred. Failure to take an RMD results in a penalty equal to 50% of the amount not withdrawn.
Important Deadlines and Penalties
- The deadline for all annual RMDs after your first is December 31.
- The first RMD can be delayed until April 1 of the year following the year you turn 73.
- Missing the RMD deadline triggers a significant penalty: 50% of the amount that should have been withdrawn but wasn’t.
Common Mistakes to Avoid
- Confusing the RMD age: Previously, it was 70½, but now it’s 73 and will rise to 75 for certain birth years.
- Taking RMDs from Roth IRAs (original owner) unnecessarily when they are exempt.
- Missing or late withdrawals leading to costly penalties.
- Applying standard RMD rules to inherited IRAs incorrectly — special rules apply depending on beneficiary status.
Strategies to Manage Your RMDs
- Consider withdrawing more than the RMD if it helps manage your tax brackets or financial needs.
- Coordinate RMDs with Social Security and other retirement income for better tax planning.
- Use tools like the IRS RMD worksheet or financial advisors for accurate calculations.
- Convert portions of traditional IRAs to Roth IRAs prior to RMD age (Roth conversions) to reduce future RMD amounts and taxes.
Additional Resources
- See our Traditional IRA glossary entry for more on IRA rules.
- Learn about Retirement Income Strategies to plan withdrawals effectively.
- Understand Tax Efficiency Methods to optimize your retirement taxes.
Frequently Asked Questions
Q: Can I skip my RMD if I don’t need the money?
A: No. The IRS requires the distribution, and skipping it results in a penalty of 50% on the missed amount plus regular income taxes due.
Q: Are RMDs required from Roth IRAs?
A: No, Roth IRAs do not require RMDs during the original owner’s lifetime.
Q: What if I inherit a retirement account?
A: Special RMD rules apply to inherited IRAs depending on your relationship to the original owner. Consult IRS Publication 590-B or a financial advisor.
Q: Where can I find the life expectancy tables?
A: The IRS publishes life expectancy tables in Publication 590-B, which can be reviewed on IRS.gov.
Summary
Required Minimum Distributions are essential for ensuring the government collects taxes on tax-deferred retirement savings by requiring withdrawals starting at age 73 (or 75 for some). Proper understanding and planning around RMDs can help you avoid heavy penalties and manage your retirement income efficiently.
References
- IRS: Required Minimum Distributions (RMDs)
- IRS Publication 590-B (2024): Distributions from Individual Retirement Arrangements (IRAs)
- Investopedia: Required Minimum Distribution (RMD)