Understanding Required Minimum Distributions (RMDs)

Planning for retirement is more than just saving money—it’s also about understanding the rules that govern how and when you can withdraw those savings. One critical rule that retirees need to be aware of is the Required Minimum Distribution (RMD).

 

RMDs are mandatory withdrawals from certain retirement accounts that begin at a specific age. These rules exist to ensure that tax-deferred retirement savings, such as those in a 401(k), IRA, or 403(b), don’t remain untaxed indefinitely. Failing to take the correct amount on time can result in hefty penalties, making it essential to stay informed.

 

With recent updates to retirement laws, including changes in the starting age for RMDs under the SECURE Act, many retirees may be unsure about their obligations. This guide will break down everything you need to know about RMDs—when they start, how they’re calculated, tax implications, and strategies to manage them effectively.

 

Whether you’re nearing retirement or managing an inherited retirement account, understanding RMDs is crucial for smart financial planning. Let’s dive in!

 

 

What Are Required Minimum Distributions (RMDs)?

 

Required Minimum Distributions (RMDs) are the minimum amounts that individuals must withdraw annually from their tax-deferred retirement accounts once they reach a certain age. These withdrawals are mandated by the Internal Revenue Service (IRS) to ensure that funds in retirement accounts are eventually taxed, rather than remaining indefinitely sheltered from taxation.

 

RMDs apply to various types of retirement accounts, including Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, and other employer-sponsored retirement accounts. However, Roth IRAs are exempt from RMDs during the account owner’s lifetime. This makes Roth IRAs an attractive option for those who wish to avoid mandatory withdrawals and continue growing their savings tax-free.

 

The amount required for withdrawal each year is based on the account balance as of December 31 of the previous year and a life expectancy factor provided by the IRS. These factors vary based on whether the account owner is taking distributions for themselves or as a beneficiary. If an individual has multiple retirement accounts, RMDs must be calculated separately for each account, though in some cases, withdrawals can be taken from one or more accounts to satisfy the total requirement.

 

Understanding RMDs is crucial because failing to withdraw the required amount can lead to significant penalties. Historically, the IRS imposed a 50% penalty on any missed RMD, though recent legislative changes have reduced this to 25%, and potentially 10% if corrected in a timely manner. Given these strict penalties, it is essential for retirees to track their RMD deadlines and amounts carefully.

 

By knowing which accounts require RMDs and how they are calculated, retirees can better manage their withdrawals, minimize tax burdens, and align their financial strategies with their retirement goals. In the next section, we’ll explore when RMDs begin and the deadlines for taking these required withdrawals.

 

 

When Do RMDs Start?

 

The age at which Required Minimum Distributions (RMDs) must begin has changed over the years due to legislative updates. Under the SECURE Act of 2019, the starting age for RMDs increased from 70½ to 72. More recently, the SECURE 2.0 Act of 2022 pushed the starting age even further—to 73 starting in 2023, and it will increase to 75 in 2033. These changes provide retirees with more time to keep their savings growing tax-deferred before mandatory withdrawals begin.

 

For most retirees, the first RMD must be taken by April 1 of the year following the year they reach their required age. For example, if an individual turns 73 in 2024, their first RMD is due by April 1, 2025. However, after the first RMD, all subsequent RMDs must be taken by December 31 of each year. This means that if a retiree delays their first RMD until April, they will have to take two RMDs in the same year—one for the prior year and one for the current year—which could push them into a higher tax bracket.

 

For those still working, RMDs from employer-sponsored plans like 401(k)s can sometimes be delayed. If an individual is still employed at age 73 (or the applicable RMD age) and does not own more than 5% of the company they work for, they may be able to postpone RMDs from their current employer’s retirement plan until they retire. However, this exception does not apply to IRAs or old 401(k) plans from previous employers—those accounts are still subject to RMDs even if the individual is still working.

 

Understanding these deadlines is crucial because missing an RMD can result in significant penalties. The IRS has reduced the penalty for missed RMDs from 50% to 25%, and it can drop to 10% if the mistake is corrected promptly. Keeping track of when RMDs start and planning withdrawals accordingly can help retirees avoid unnecessary tax burdens and penalties.

 

 

How Are RMDs Calculated?

 

Calculating Required Minimum Distributions (RMDs) involves a simple formula, but it’s crucial to get it right to avoid penalties. The amount an individual must withdraw each year is determined by dividing the total balance of their retirement account as of December 31 of the previous year by a life expectancy factor provided by the IRS. This factor is based on IRS Life Expectancy Tables, which estimate how long a person is expected to live and, therefore, how much they should withdraw each year.

 

1. The Basic RMD Formula:

$$\text{RMD} = \frac{\text{Account Balance (as of Dec 31 last year)}}{\text{Life Expectancy Factor (from IRS Table)}}$$

 

The IRS provides three main life expectancy tables:

• Uniform Lifetime Table – Used by most account owners.

• Joint and Last Survivor Table – Used if the retiree’s spouse is the sole beneficiary and is more than 10 years younger.

• Single Life Expectancy Table – Used for inherited IRAs by non-spouse beneficiaries.

 

For example, let’s say a retiree has a traditional IRA balance of $500,000 on December 31 of the previous year and their life expectancy factor from the IRS table is 24.6. Their RMD calculation would be:

 

$$\frac{500,000}{24.6} = 20,325.20$$

 

This means the retiree must withdraw at least $20,325.20 for the year. If they have multiple retirement accounts, they must calculate RMDs separately for each account, though they may be able to withdraw the total amount from one or more accounts, depending on the type of account.

 

2. How RMDs Change Over Time

Because RMDs are recalculated annually using a new life expectancy factor, they typically increase as the retiree ages. Since the account balance is divided by a shrinking life expectancy number, the required withdrawal amount grows over time. This can have tax implications, especially for retirees who rely on Social Security or have other sources of taxable income.

 

3. Inherited IRA RMDs

For beneficiaries who inherit an IRA, the calculation differs. Under the SECURE Act, most non-spouse beneficiaries must withdraw the entire account balance within 10 years of the original owner’s death, rather than spreading withdrawals over their lifetime. However, exceptions exist for spouses, disabled individuals, and minor children who can still use the old life expectancy method.

 

By understanding how RMDs are calculated and planning withdrawals strategically, retirees can better manage their tax burden and avoid unnecessary penalties. In the next section, we’ll explore the tax implications of RMDs and strategies to reduce their impact.

 

 

Tax Implications of RMDs

 

Required Minimum Distributions (RMDs) can have significant tax consequences because they are generally considered taxable income in the year they are withdrawn. Since most retirement accounts subject to RMDs—such as Traditional IRAs, 401(k)s, and 403(b)s—were funded with pre-tax dollars, any distributions taken are taxed at the retiree’s ordinary income tax rate. Understanding how RMDs affect taxation is crucial for managing retirement income efficiently and avoiding unexpected tax bills.

 

1. How RMDs Are Taxed

RMDs are taxed as ordinary income, meaning they are added to other sources of taxable income such as Social Security benefits, pension payments, or rental income. This can potentially push retirees into a higher tax bracket, leading to increased tax liability. Unlike capital gains from investments, which may be taxed at lower rates, RMDs do not benefit from preferential tax treatment.

 

2. Impact on Social Security Benefits

For retirees receiving Social Security benefits, RMDs can cause a larger portion of those benefits to become taxable. If total income—including RMDs—exceeds a certain threshold, up to 85% of Social Security benefits could become taxable. This is particularly important for retirees who are carefully managing their income to minimize taxes on their Social Security payments.

 

3. Effect on Medicare Premiums

Another potential consequence of large RMDs is an increase in Medicare premiums. Medicare Part B and Part D premiums are based on Modified Adjusted Gross Income (MAGI) from two years prior. If RMDs push a retiree’s income over specific thresholds, they may face higher Medicare premiums due to the Income-Related Monthly Adjustment Amount (IRMAA). This can result in hundreds or even thousands of dollars in additional healthcare costs each year.

 

4. Strategies to Reduce Tax Impact

While RMDs are unavoidable, there are several strategies retirees can use to minimize their tax burden:

• Qualified Charitable Distributions (QCDs) – Individuals aged 70½ or older can donate up to $100,000 per year directly from their IRA to a qualified charity. These donations count toward RMDs but are not included in taxable income, reducing the overall tax impact.

• Roth Conversions – Converting portions of a Traditional IRA or 401(k) to a Roth IRA before RMDs begin can help reduce future RMD amounts, as Roth IRAs are not subject to RMDs during the owner’s lifetime. Although conversions create taxable income in the year they occur, they can provide tax-free withdrawals in retirement.

• Delaying Social Security Benefits – Since Social Security benefits increase for each year they are delayed up to age 70, some retirees may choose to delay taking benefits while using early retirement withdrawals to reduce future RMD amounts.

• Spreading Withdrawals – Instead of waiting until RMDs begin, retirees can start taking distributions earlier to spread out taxable income and avoid large tax spikes in later years.

 

By planning ahead and implementing tax-efficient strategies, retirees can manage their RMDs more effectively, minimize their tax burden, and preserve more of their retirement savings. In the next section, we’ll explore what happens if you fail to take an RMD and how to correct the mistake if it occurs.

 

 

What Happens If You Don’t Take Your RMD?

 

Failing to take your Required Minimum Distribution (RMD) can result in steep penalties, making it crucial to stay on top of withdrawal deadlines. In the past, the IRS imposed one of the harshest penalties in the tax code for missing an RMD—a 50% excise tax on the amount that should have been withdrawn. However, under the SECURE 2.0 Act of 2022, this penalty has been reduced to 25% and can be further lowered to 10% if the mistake is corrected in a timely manner.

 

1. The Penalty for a Missed RMD

If a retiree fails to withdraw the required amount by the December 31 deadline (or April 1 for the first RMD), the shortfall amount is subject to a 25% excise tax. For example, if an individual was supposed to withdraw $20,000 but forgot, they could owe a $5,000 penalty (25% of $20,000) in addition to ordinary income tax on the eventual withdrawal.

 

However, if the mistake is corrected within two years, the penalty may be reduced to 10%. This change provides retirees with a better chance to rectify errors without facing severe financial consequences.

 

2. How to Correct a Missed RMD

If you’ve missed an RMD, taking immediate action can help minimize penalties. Here’s what to do:

• Withdraw the missed amount as soon as possible. The IRS is more lenient when mistakes are corrected quickly.

• File IRS Form 5329. This form reports the missed RMD and requests penalty relief if applicable.

• Request a waiver of the penalty. The IRS may waive the penalty if the account holder provides a valid reason for missing the RMD, such as a medical issue, clerical error, or lack of awareness. Along with Form 5329, individuals should submit a letter explaining the mistake and showing that they have now taken the correct RMD.

 

3. Avoiding Future RMD Mistakes

To ensure RMDs are taken on time, retirees can:

• Set calendar reminders for annual withdrawal deadlines.

• Work with a financial advisor or tax professional to track RMD obligations.

• Automate withdrawals with their financial institution to avoid forgetting.

 

Missing an RMD can be costly, but understanding the penalties and knowing how to fix mistakes can help retirees stay compliant and avoid unnecessary financial stress. In the next section, we’ll discuss strategies to manage RMDs efficiently and minimize their tax impact.

 

 

Strategies to Manage RMDs Efficiently

 

While Required Minimum Distributions (RMDs) are unavoidable for most retirement accounts, there are several strategies retirees can use to manage withdrawals efficiently, reduce tax burdens, and maximize retirement savings. Proper planning can help retirees avoid unnecessary taxes and ensure that their withdrawals align with their overall financial goals.

 

1. Qualified Charitable Distributions (QCDs) to Reduce Taxable Income

A powerful strategy for reducing the tax impact of RMDs is making a Qualified Charitable Distribution (QCD). Individuals aged 70½ or older can donate up to $100,000 per year directly from their IRA to a qualified charity. The key benefit is that this donation:

• Counts toward RMD requirements

• Is not included in taxable income

• Helps lower Adjusted Gross Income (AGI), which can reduce Medicare premiums and the taxation of Social Security benefits

 

For retirees who already plan to give to charity, using a QCD can be a tax-efficient way to meet both charitable goals and RMD obligations.

 

2. Roth Conversions to Reduce Future RMDs

Since Roth IRAs are not subject to RMDs during the owner’s lifetime, converting portions of a Traditional IRA or 401(k) into a Roth IRA before reaching RMD age can help lower future RMD obligations. Although the conversion itself generates taxable income, spreading it out over multiple years—especially in lower-income years before RMDs begin—can help retirees control their tax brackets.

 

This strategy works particularly well for retirees who anticipate being in a higher tax bracket in later years due to large RMDs or other income sources. By gradually shifting taxable retirement savings into a tax-free Roth account, retirees can reduce the size of their tax-deferred accounts and lower their future RMD amounts.

 

3. Strategic Withdrawals Before RMD Age

Rather than waiting until RMDs begin at age 73 (or 75 in 2033), some retirees choose to start withdrawing funds earlier in a controlled manner. By taking smaller withdrawals before RMDs are required, retirees can:

• Reduce the size of their tax-deferred accounts, leading to smaller RMDs later

• Smooth out taxable income over time, avoiding large tax spikes in later years

• Take advantage of lower tax brackets before Social Security or pension income begins

 

This approach requires careful planning, but it can be a smart way to manage tax liability over the long term.

 

4. Spreading RMDs Across Multiple Accounts

For retirees with multiple retirement accounts—such as IRAs and 401(k)s—it’s important to know how RMDs work across different types of accounts:

• For IRAs: The total RMD amount can be taken from one or multiple IRAs, offering flexibility in choosing which account to withdraw from.

• For 401(k)s and other employer plans: RMDs must be taken separately from each account. Consolidating multiple 401(k)s into a single IRA before RMD age can simplify withdrawals and give retirees more control over where to take distributions.

 

5. Delaying RMDs from Employer-Sponsored Plans

If a retiree is still working past RMD age and does not own more than 5% of their company, they may be able to delay RMDs from their current employer’s 401(k) or 403(b) plan until they retire. This can help postpone taxable withdrawals and allow retirement savings to continue growing tax-deferred.

 

6. Using RMDs for Tax-Efficient Investing

Instead of spending RMD withdrawals, retirees who don’t need the income can reinvest the funds in a tax-efficient brokerage account. While these investments will be subject to capital gains taxes in the future, they can be strategically placed in tax-advantaged vehicles, such as municipal bonds or index funds, to minimize future tax impact.

 

Managing RMDs efficiently requires a proactive approach. Whether through charitable giving, Roth conversions, early withdrawals, or strategic reinvestments, retirees can optimize their RMD strategy to reduce taxes and maximize retirement income. By planning ahead and consulting with a financial advisor or tax professional, retirees can ensure their distributions align with their financial goals while minimizing tax consequences.

 

 

RMD Rules for Inherited Retirement Accounts

 

When a retirement account is inherited, the rules for Required Minimum Distributions (RMDs) depend on several factors, including the type of account, the relationship to the original owner, and when the account was inherited. The SECURE Act of 2019 introduced significant changes to these rules, particularly for non-spouse beneficiaries, making it essential to understand how to comply with the new requirements.

 

1. Spouse Beneficiaries: More Flexibility

If a surviving spouse inherits a retirement account, they have several options for how to handle RMDs:

• Roll the inherited account into their own IRA – This allows them to treat the funds as if they were their own, delaying RMDs until they reach age 73 (or 75 in 2033).

• Remain a beneficiary of the inherited account – This allows them to use their deceased spouse’s RMD schedule if the original owner had already started withdrawals.

• Withdraw the entire account at any time – Unlike non-spouse beneficiaries, spouses are not subject to the 10-year withdrawal rule.

 

For many surviving spouses, rolling the inherited funds into their own IRA is the most tax-efficient option, as it allows for continued tax-deferred growth and control over RMD timing.

 

2. Non-Spouse Beneficiaries: The 10-Year Rule

Under the SECURE Act, most non-spouse beneficiaries are required to withdraw the full balance of an inherited retirement account within 10 years of the original owner’s death. This applies to Traditional IRAs, Roth IRAs, 401(k)s, and other tax-deferred accounts.

• RMDs may or may not be required annually – If the original owner had already started taking RMDs before passing away, the beneficiary must continue annual withdrawals within the 10-year window.

• For Roth IRAs, the 10-year rule still applies, but withdrawals remain tax-free as long as the account has been open for at least five years.

• Failure to withdraw the full amount by the end of the 10th year results in a 50% penalty on any remaining funds.

 

This rule prevents beneficiaries from stretching withdrawals over their lifetime, requiring them to take out funds more quickly and potentially face higher tax burdens.

 

3. Exceptions to the 10-Year Rule

Some non-spouse beneficiaries qualify for "Eligible Designated Beneficiary" (EDB) status, allowing them to take RMDs over their own life expectancy instead of following the 10-year rule. This applies to:

• Minor children of the account owner (but only until they reach the age of majority, after which the 10-year rule applies)

• Disabled or chronically ill individuals

• Beneficiaries who are less than 10 years younger than the account owner

 

These exceptions allow certain individuals to stretch distributions over a longer period, reducing the immediate tax impact.

 

4. Tax Implications for Inherited Accounts

• Traditional IRAs and 401(k)s – Withdrawals are taxed as ordinary income, which can push beneficiaries into a higher tax bracket if large amounts are withdrawn in a short period.

• Roth IRAs – Since contributions were made with after-tax dollars, withdrawals are generally tax-free, making inherited Roth IRAs a valuable asset for beneficiaries.

 

5. Planning Strategies for Beneficiaries

To manage the tax impact of inherited RMDs, beneficiaries can:

• Spread withdrawals over multiple years to avoid large tax bills in a single year.

• Use inherited Roth IRAs strategically by waiting until the 10th year to withdraw funds, maximizing tax-free growth.

• Consider their own tax bracket before taking distributions, potentially timing withdrawals in lower-income years.

 

The rules for inherited retirement accounts have changed significantly, requiring beneficiaries to plan carefully to avoid unnecessary taxes and penalties. Spouses have the most flexibility, while non-spouse beneficiaries must follow the 10-year rule unless they qualify for an exception. Understanding these rules can help beneficiaries make informed decisions about their inheritance while minimizing tax consequences.

 

 

Common RMD Mistakes to Avoid

 

While Required Minimum Distributions (RMDs) are a standard part of retirement planning, many retirees make mistakes that can lead to unnecessary penalties or tax burdens. Being aware of these common mistakes can help you avoid costly errors and ensure you remain in compliance with IRS rules. Below are some of the most frequent mistakes people make when it comes to RMDs and how to avoid them.

 

1. Failing to Take an RMD

One of the most common—and costly—mistakes is simply failing to take an RMD. If you forget or miss the deadline, the IRS imposes a 50% penalty on the amount that should have been withdrawn, which is a significant financial burden. While the penalty has been reduced to 25% under the SECURE 2.0 Act and can drop to 10% if corrected promptly, it’s still best to avoid this mistake entirely.

 

How to Avoid It:

 
Set up automatic withdrawals with your financial institution or retirement account provider. Additionally, keep track of important dates and deadlines by marking them on your calendar or using online reminders. Regularly review your accounts to ensure that the required withdrawals are being taken.

 

2. Withdrawing from the Wrong Account

When retirees have multiple retirement accounts (like IRAs, 401(k)s, and 403(b)s), they may mistakenly withdraw from the wrong account. It’s important to note that while you must take separate RMDs from each employer-sponsored retirement account, you can take your total RMD from one or more IRAs (but not a combination of IRAs and 401(k)s).

 

How to Avoid It:

 
Keep track of which accounts require RMDs and which accounts have already been withdrawn from. If you have multiple IRAs, consider consolidating them into one to simplify the process and ensure that you take the correct total distribution amount.

 

3. Taking RMDs from a Roth IRA

Roth IRAs do not require RMDs during the account holder's lifetime, so taking unnecessary distributions from a Roth IRA can reduce the tax-free growth potential of the account. However, beneficiaries inheriting Roth IRAs are still subject to the RMD rules.

 

How to Avoid It:
 

If you’re the original account holder, remember that Roth IRAs do not require RMDs for you. However, if you are inheriting a Roth IRA, you will need to follow the RMD rules. Be sure to distinguish between your own Roth IRA and any inherited Roth IRAs to avoid premature withdrawals.

 

4. Not Taking the Full RMD Amount

It’s easy to miscalculate or underestimate the RMD amount, especially when it comes to life expectancy tables and changing account balances. Withdrawing an amount less than required will incur the 50% penalty on the shortfall.

 

How to Avoid It:
 

Carefully calculate the RMD by using the correct life expectancy factor and ensuring you have the most up-to-date account balance as of December 31 of the prior year. Double-check your calculations, and if you’re unsure, consult a financial advisor or use the online calculators provided by the IRS or other trusted financial institutions.

 

5. Waiting Too Long to Take the First RMD

The first RMD must be taken by April 1 of the year following the year you turn 73 (or 75, depending on your birth year). However, if you delay the first RMD until April 1, you will have to take two RMDs in the same year—one for the prior year and one for the current year. This could push you into a higher tax bracket, causing unnecessary tax consequences.

 

How to Avoid It:
 

Plan ahead and take your first RMD in the year you turn 73 (or 75) rather than delaying until April 1. This allows you to spread out your tax burden and avoid the potential for two large withdrawals in a single year.

 

6. Ignoring the 10-Year Rule for Inherited IRAs

With the passing of the SECURE Act, most non-spouse beneficiaries are now required to withdraw the entire balance of an inherited IRA within 10 years of the original owner’s death. Many beneficiaries make the mistake of assuming they can take their time with withdrawals. Failing to take the required distributions can result in the 50% penalty on any amount that should have been withdrawn but wasn’t.

 

How to Avoid It:
 

Familiarize yourself with the 10-year rule if you’re an inherited IRA beneficiary. Be sure to take annual withdrawals if required, or at the very least, make sure the full balance is withdrawn by the end of the 10-year period. If you’re uncertain about how to proceed, consult with a tax professional.

 

7. Forgetting to Adjust for Changes in Account Balances

RMDs are calculated based on the account balance at the end of the previous year, and because retirement accounts can fluctuate in value, it’s important to adjust your RMD calculation accordingly. Retirees often forget to adjust their RMD when account values change due to market performance, which can lead to over- or under-withdrawing.

 

How to Avoid It:
 

Review your account balance regularly and ensure that the current year’s RMD is based on the correct balance as of December 31 of the previous year. Regularly updating your account balances and rechecking RMD amounts will help ensure you’re withdrawing the proper amount.

 

 

Conclusion

 

Required Minimum Distributions (RMDs) are a crucial part of retirement planning, ensuring that retirement funds are eventually taxed and not left untouched indefinitely. While RMDs might seem complex at first, understanding their rules and implications can help retirees avoid costly mistakes and maximize the benefit of their hard-earned savings.

 

Throughout this post, we've discussed the RMD rules, including when they start, how they’re calculated, and the tax implications they carry. We’ve explored strategies for minimizing the tax impact of RMDs, such as Qualified Charitable Distributions (QCDs), Roth conversions, and strategic withdrawals. Additionally, we covered how RMDs apply to inherited retirement accounts and reviewed common mistakes to avoid, such as failing to take the correct amount or withdrawing from the wrong account.

 

The key takeaway is that with proper planning, RMDs don’t have to be a burden. By staying informed about RMD rules and considering strategies to reduce taxes, you can make withdrawals in a way that supports your long-term financial goals. Whether you're a retiree or a beneficiary inheriting an account, taking proactive steps will help you navigate RMDs more effectively.

 

As always, if you feel uncertain about any aspect of RMDs or need help creating a tax-efficient strategy, consulting with a financial advisor or tax professional can provide valuable guidance tailored to your individual situation. By planning ahead and avoiding common mistakes, you can ensure that RMDs work for you, rather than against you, helping you maintain control over your retirement income.

 

In conclusion, understanding RMDs and their impact on your retirement finances is essential for a successful retirement strategy. With the right knowledge and planning, you can minimize taxes, avoid penalties, and make the most of your retirement savings.

 

 

Frequently Asked Questions (FAQs)

 

1. What is an RMD, and why do I have to take it?

An RMD (Required Minimum Distribution) is the minimum amount you must withdraw from your tax-deferred retirement accounts, such as Traditional IRAs, 401(k)s, and 403(b)s, once you reach a certain age. The purpose of RMDs is to ensure that you eventually pay taxes on the funds you’ve saved in these accounts, as they were funded with pre-tax dollars. The IRS requires RMDs to start at age 73 (or 75 in 2033) for most retirement account holders.

 

2. At what age do I need to start taking RMDs?

Under the SECURE 2.0 Act, RMDs must begin by age 73 (for individuals born in 1951 or later). If you reach age 73 in 2023 or beyond, you must start taking RMDs no later than April 1 of the year following your 73rd birthday. Starting in 2033, the RMD age will increase to 75. However, if you turn 73 before January 1, 2023, your RMDs must begin at age 72.

 

3. How is my RMD amount calculated?

Your RMD is calculated by dividing the balance of your retirement account as of December 31 of the prior year by your life expectancy factor as provided in the IRS Uniform Lifetime Table. The account balance is the total value of the account on December 31st, and the life expectancy factor is based on your age. For example, if you are 73 years old and your account balance is $100,000, the life expectancy factor for your age is 27.4, meaning your RMD for that year would be $100,000 ÷ 27.4 = $3,649.64.

 

4. What happens if I don’t take my RMD?

If you fail to take your RMD, the IRS imposes a hefty 50% penalty on the amount you should have withdrawn, which is a serious financial consequence. However, under the SECURE 2.0 Act, this penalty can be reduced to 25% and even further to 10% if the error is corrected within a reasonable timeframe. You must also pay income tax on any withdrawals you fail to take.

 

5. Can I withdraw more than my RMD?

Yes, you can withdraw more than the required minimum, but the excess withdrawals will be subject to ordinary income tax. Taking more than the required amount can help you manage your tax situation or meet other financial needs, but it’s important to plan accordingly, as it may push you into a higher tax bracket.

 

6. Do RMDs apply to Roth IRAs?

No, Roth IRAs are not subject to RMDs during the account holder’s lifetime. However, inherited Roth IRAs are subject to RMDs for beneficiaries, and the IRS requires that the full balance be withdrawn within 10 years after the original account holder's death.

 

7. Can I delay my first RMD?

Yes, you can delay your first RMD until April 1 of the year following the year you turn 73. However, delaying your first RMD means you’ll have to take two RMDs in the same year—one for the prior year and one for the current year. This can result in a higher tax burden, so it’s often better to take your first RMD in the year you turn 73 rather than waiting.

 

8. Can I use my RMDs for charitable donations?

Yes, if you’re 70½ or older, you can use a Qualified Charitable Distribution (QCD) to donate up to $100,000 directly from your IRA to a qualifying charity. The amount donated through a QCD counts toward your RMD for the year, and the donation is not taxable. This is an excellent strategy for those who wish to lower their taxable income while supporting charitable causes.

 

9. What happens if I inherit a retirement account?

When you inherit a retirement account, the rules for RMDs depend on your relationship to the deceased and whether the account is a Traditional IRA or 401(k). Most non-spouse beneficiaries must withdraw the entire balance of the account within 10 years (known as the 10-year rule). However, there are exceptions, such as for minor children, disabled individuals, or those who are less than 10 years younger than the original account holder. Spouse beneficiaries have more flexibility and can either treat the inherited account as their own or take RMDs based on the original account holder's schedule.

 

10. Can I avoid RMDs by converting my IRA to a Roth IRA?

While converting a Traditional IRA to a Roth IRA can help eliminate RMDs, it does not prevent RMDs from applying to your current accounts. Conversions will trigger taxes on the amount you convert, and Roth IRAs do not require RMDs during your lifetime. By converting early, you can avoid RMDs later and allow your money to grow tax-free in the Roth IRA. However, it’s important to consider the tax impact of converting a large sum.

 

11. Can I take my RMDs from just one of my retirement accounts?

If you have multiple IRAs, you can take the total amount required across your various IRA accounts as long as the total withdrawal meets your RMD requirement. However, for 401(k)s, 403(b)s, and other employer-sponsored plans, RMDs must be taken separately from each plan.

 

12. What are the tax implications of RMDs?

RMDs are taxable as ordinary income, meaning they are added to your taxable income for the year. The amount of tax you owe depends on your tax bracket and other sources of income. The more you withdraw in RMDs, the higher your potential tax bill. Strategic planning, such as taking distributions in years when you expect to be in a lower tax bracket, can help minimize taxes on RMDs.