Learn How Required IRA Distributions Work

Understanding Required Minimum Distributions (RMDs)

A Required Minimum Distribution, or RMD, is the smallest amount of money you must withdraw from certain retirement accounts each year once you reach a specific age. The Internal Revenue Service (IRS) sets these rules to ensure that people don't keep money in tax-advantaged retirement accounts indefinitely without paying taxes on it. Understanding how RMDs work is important because failing to take the correct amount can result in a penalty of 25% of the amount you didn't withdraw (as of 2023, with a minimum penalty of $100 per missed distribution).

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The concept behind RMDs is straightforward: the government allowed you to save money in retirement accounts with tax breaks while you were working. In exchange, they expect you to start withdrawing and paying taxes on that money once you reach retirement age. RMDs apply to most tax-deferred retirement accounts, including traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and similar plans. However, Roth IRAs have different rules and generally do not require distributions during the account holder's lifetime.

The age at which RMDs begin changed in recent years. Under the SECURE Act passed in 2019, the starting age moved from 70½ to 73 for people who turn 73 after December 31, 2022. This means if you were born in 1950, your first RMD is due by April 1, 2023. If you were born later, your RMD age will be 73. The rules continue to evolve, with plans to gradually increase this age to 75 for people born in 1961 or later.

Practical takeaway: Mark your calendar for the year you turn 73. That's when you'll need to begin calculating and taking RMDs from your traditional retirement accounts. If you miss your first RMD deadline, you have until April 1 of the following year, but you'll still owe the distribution amount from the previous year.

How RMD Amounts Are Calculated

Calculating your RMD involves three basic pieces of information: your account balance as of December 31 of the previous year, your age, and a life expectancy factor provided by the IRS in publication tables. The formula is simple: divide your account balance by the life expectancy factor that matches your age. For example, if you have $500,000 in your traditional IRA on December 31, 2023, and you turn 73 in 2024, you would look up the life expectancy factor for age 73 (which is 26.5 according to IRS tables). Your RMD would be $500,000 divided by 26.5, which equals approximately $18,868.

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The IRS provides three different life expectancy tables depending on your situation. The Uniform Lifetime Table applies to most people and accounts for a longer life expectancy. The Joint and Last Survivor Table is used when your spouse is more than 10 years younger than you and is the sole beneficiary of your account. The Single Life Expectancy Table applies only to beneficiaries after the original account holder has died. Most people use the Uniform Lifetime Table, which assumes a longer lifespan and therefore results in smaller required withdrawals.

If you have multiple retirement accounts, you calculate the RMD for each account separately based on that account's balance. However, if the accounts are all traditional IRAs, you can add up all the RMD amounts and withdraw the total from one or more IRAs—you don't have to withdraw from each account separately. This flexibility doesn't apply to 401(k)s and similar employer plans; you must calculate RMDs separately for each one and take the distribution from that specific plan, unless your employer plan allows for aggregation.

One important detail: the balance used for calculating your RMD is the fair market value of your account on December 31 of the previous year. If your account dropped in value during the year, this doesn't affect your RMD calculation. If it grew significantly, your RMD will be larger next year. This means your RMD amount changes annually, so you'll need to recalculate each year based on the new account balance.

Practical takeaway: Keep detailed records of your account balance on December 31 each year. Many financial institutions send RMD calculation worksheets or statements to help you determine the correct amount. Don't rely on guessing; use the official IRS tables or ask your financial institution for help with the calculation.

Deadlines and Timing for Taking Distributions

The deadline for taking your first RMD is April 1 of the year following the year in which you turn 73. This is called your "required beginning date." For example, if you turn 73 in 2024, your first RMD must be withdrawn by April 1, 2025. This first RMD covers the entire 2024 tax year. After that, all subsequent RMDs must be withdrawn by December 31 of each year.

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Many people don't realize that taking your first RMD by April 1 means you'll have two RMD withdrawals in that first year: one covering the previous year (due by April 1) and one covering the current year (due by December 31). This timing can have tax consequences because both distributions count as income in that calendar year, potentially pushing you into a higher tax bracket. Some people plan ahead to manage this situation, though there are no official ways to avoid it.

You can take your RMD all at once or in multiple installments throughout the year. Some people withdraw monthly amounts to spread out their tax burden evenly across the year. Others take one lump sum. Your financial institution may offer automatic RMD distributions, where a set amount is withdrawn monthly or quarterly. This can help ensure you don't accidentally miss a deadline.

It's important to understand that the IRS considers an RMD "received" on the date the funds are actually paid to you, not the date you request the withdrawal. If you request a distribution on December 29 but the funds don't arrive in your account until January 5, the IRS considers it a distribution for the following year. This timing matters when you're close to the December 31 deadline. To be safe, request RMDs at least one week before December 31 to account for processing delays.

Practical takeaway: Plan ahead for your first RMD deadline. If you turn 73 in late 2024 or early 2025, start calculations in mid-2024 so you have time to make arrangements. Consider setting up automatic monthly distributions to ensure you don't accidentally miss a deadline and incur a penalty.

Types of Accounts Subject to RMDs

RMDs apply to most types of tax-deferred retirement accounts. Traditional IRAs are subject to RMD rules once the account holder turns 73. This includes SEP IRAs (Simplified Employee Pension IRAs) and SIMPLE IRAs, which are employer-sponsored plans but function like traditional IRAs in many ways. If you have a traditional IRA, an inherited IRA, a SEP IRA, or a SIMPLE IRA, you'll need to take RMDs.

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Employer-sponsored retirement plans like 401(k)s, 403(b)s, and 457(b) plans are also subject to RMDs. However, some employer plans allow what's called the "still-working exception." If you're still employed by the company sponsoring your 401(k) and you don't own 5% or more of the company, you may be able to delay RMDs from that specific plan until you retire. This can be useful if you want to delay withdrawals and reduce your taxable income. This exception does not apply to IRAs.

Roth IRAs are notably different. If you're the original account holder, you do not have to take RMDs during your lifetime. You can leave the money in the account to grow tax-free indefinitely. This makes Roth IRAs attractive for people who don't need the money and want to pass a large tax-free account to their heirs. However, beneficiaries who inherit a Roth IRA do have distribution requirements, though the taxes work differently because Roth withdrawals are generally tax-free.

If you have multiple accounts of the same type (for example, three different traditional IRAs), you must add up the RMD amounts from all of them and can withdraw the total from one or more of the accounts. However