You spent decades contributing to your retirement accounts, investing those dollars, and allowing them to grow tax-deferred. Eventually, however, the IRS requires you to begin taking some of that money out.
Those mandatory withdrawals are known as Required Minimum Distributions, or RMDs.
While the basic concept is fairly simple, RMDs can have important implications for your taxes, retirement income, charitable giving, and overall financial plan. Here are the basics every retiree should understand.
What Is an RMD?
A Required Minimum Distribution is the minimum amount you generally must withdraw each year from certain tax-deferred retirement accounts after reaching the applicable RMD age.
RMD rules generally apply to accounts such as:
Traditional IRAs
SEP IRAs
SIMPLE IRAs
Traditional 401(k) plans
403(b) plans
Certain 457(b) plans
One important exception is Roth accounts. Roth IRAs do not have RMDs during the original owner's lifetime. Beginning in 2024, designated Roth accounts in employer plans, such as Roth 401(k)s and Roth 403(b)s, are also exempt from lifetime RMD requirements. Beneficiaries, however, may be subject to separate distribution rules.
When Do RMDs Begin?
Under current law, the starting age depends on your date of birth.
For many current retirees, RMDs generally begin at age 73. Under the SECURE 2.0 Act, the applicable RMD age increases to 75 for people who attain age 74 after December 31, 2032.
Your first RMD can generally be delayed until April 1 of the year following the year in which you reach your applicable RMD age. But there's a catch: delaying that first distribution means you will generally have to take two RMDs in the same calendar year - your delayed first RMD by April 1 and your second by December 31.
Taking two taxable distributions in one year could potentially push you into a higher tax bracket or affect other tax-related items. That's one reason the timing of your first RMD deserves some planning rather than simply waiting until the deadline.
Special rules may also allow certain employees participating in an employer-sponsored retirement plan to delay RMDs from that plan until retirement.
How Is Your RMD Calculated?
Fortunately, you usually don't need to guess.
Your annual RMD is generally calculated using two pieces of information:
Your retirement account balance as of December 31 of the previous year ÷ an IRS life-expectancy factor.
For example, if your applicable retirement account balance was $500,000 at the end of the previous year, your RMD would be determined by dividing that amount by the appropriate IRS distribution factor based on your age and circumstances.
The percentage you are required to withdraw generally increases as you get older.
If you own multiple IRAs, an RMD is calculated separately for each IRA. However, you generally may satisfy your total IRA RMD by taking the appropriate total amount from one IRA or a combination of your IRAs.
Employer plans such as 401(k)s generally have different aggregation rules, so it's important not to assume that one withdrawal can satisfy the requirements for every type of retirement account.
Are RMDs Taxable?
In most cases, distributions from traditional retirement accounts are taxed as ordinary income.
That means your RMD can affect more than just the balance of your retirement account. Additional taxable income may potentially affect:
Your federal and state income taxes
The taxation of Social Security benefits
Medicare income-related premium adjustments (IRMAA)
Your overall retirement withdrawal strategy
This is where RMD planning becomes particularly important. Instead of looking at an RMD as an isolated transaction, it can be helpful to consider it as part of your larger retirement income and tax strategy.
What If You Don't Need the Money?
An RMD requires you to take the distribution, but it doesn't require you to spend it.
If you don't need your RMD for living expenses, there may be several options to consider. You could reinvest the after-tax proceeds in a taxable investment account, use the funds for family gifting or other financial goals, or incorporate the distribution into your charitable giving strategy.
For charitably inclined retirees, a Qualified Charitable Distribution (QCD) can be especially valuable. Once an IRA owner reaches age 70½, eligible distributions can be sent directly from an IRA to a qualifying charity. A qualifying QCD can count toward the year's RMD while generally being excluded from taxable income.
What Happens If You Miss an RMD?
Missing an RMD can be costly. The additional tax for failing to take the required amount is generally 25% of the amount that should have been withdrawn. Under certain circumstances, that rate may be reduced to 10% if the mistake is corrected within the applicable correction period.
That's a strong incentive to make RMD planning part of your annual financial checklist rather than waiting until the final weeks of December.
RMDs Are More Than a Deadline
It's easy to view RMDs as simply another IRS requirement, but they can also create valuable financial planning opportunities.
In the years leading up to RMD age, retirees may want to evaluate strategies such as Roth conversions, strategic IRA withdrawals, charitable giving through QCDs, and coordinating withdrawals with Social Security and other sources of retirement income.
The goal isn't simply to determine how much you're required to withdraw this year. The bigger question is how those withdrawals fit into your long-term retirement and tax plan.
Planning ahead can make a difference. If you're approaching RMD age, or already taking distributions, consider reviewing your retirement accounts, tax situation, charitable goals, and income needs with your financial and tax professionals. A coordinated strategy can help ensure that your required distributions support the retirement plan you've spent years building.
This material is provided for general educational purposes only and should not be considered individualized investment, tax, or legal advice. Tax laws and regulations may change. Consult your financial, tax, and legal professionals regarding your individual circumstances.