When you hear the phrase “retirement planning”, you probably think about building up a nest egg to carry you through your post-work years. Saving for retirement is a big deal, that’s true. But what you may not realize is, there are also rules for spending the funds you’ve accumulated. Specifically, a required minimum distribution (RMD) is an amount you have to withdraw from your account each year in order to avoid tax consequences.
Understanding (and following) the rules of RMDs is a key piece of retirement planning that can save you stress, time, and money on potential penalties. Here, we’ll cover the ins and outs of RMDs including when they begin, which accounts they affect, how to calculate them, what the penalties are, and other considerations.
What are Required Minimum Distributions (RMDs)?
A required minimum distribution (RMD) refers to the minimum amount you must take out of your retirement accounts each year, as required by the IRS. Currently, RMDs apply to a variety of retirement account types, including:
- All employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans
- Traditional IRAs
- Self-employed retirement plans such as SEP, SARSEP, and SIMPLE IRAs.
- Roth 401(k)s
RMD rules don’t apply to Roth IRAs as long as the owner is alive (the heirs to an inherited Roth IRA will generally have to take them).
If you fail to take the full amount of the required distribution, or you don’t take the required amount in time, you’ll incur a hefty tax penalty. No one likes paying more taxes than necessary—and that goes double for retirees. So, read on to learn the requirements for RMDs.
What Are the Rules for RMDs?
While the basic concept hasn’t changed, the recently passed SECURE 2.0 Act (Setting Every Community Up for Retirement Enhancement) includes updates to many of the rules for RMDs:
In 2023, the requisite age to begin taking RMDs increased to 73 years (unfortunately, if you've already started RMDs, the change doesn't apply)
The age at which you need to begin taking RMDs will increase again to 75 in the year 2033
The penalty for missed RMDs has been reduced from 50% to 25%
You can further reduce the penalty to 10% if you take the missed distribution during the so-called “correction window” which is approximately within two years of the missed payment
The deadline for taking your first RMD is April 1 of the year after you turn 73. After that, RMDs must be taken by December 31 of each year.
Beyond RMDs, SECURE 2.0 includes a number of other changes designed to benefit retirees. Watch this video for a summary of SECURE 2.0 updates that affect retirees.
How to Calculate RMD Amounts
To calculate RMD amounts yourself, it’s based on the balance of each account, divided by a life expectancy factor published yearly by the IRS. There are multiple life expectancy tables based on various life situations.
If calculating your RMD amounts sounds about as fun as a root canal, don’t worry! Your retirement account custodian or financial advisor will be able to tell you the required amounts and help you adhere to the deadlines.
Other FAQs about RMDs
A few other points to note about RMDs:
You can take more than the required amount—and some retirees do. But be prepared for a potential shock when tax time rolls around.
It is possible to donate your RMD (and avoid tax consequences) by using a qualified charitable distribution taken directly from your IRA
If you have multiple retirement accounts subject to RMDs, you can withdraw the aggregated total from a single account or a portion from each. But you’ll still need to calculate the required amounts for each account separately.
Tax Management Strategy for RMDs
Between ever-changing rules, calculations, keeping up with deadlines, and of course, taxes, RMDs can be a drag. The good news is, you don’t have to do it alone. A financial advisor will help you with the heavy lifting of meeting your RMDs, so you can avoid penalties and keep more of your retirement money for the things you love.
Beyond that, the right financial advisor will have a comprehensive tax management strategy to help you maximize your savings and avoid paying too much in taxes, across all aspects of your retirement plan. For example, our firm’s tax management strategy involves things like balancing your money across different types of accounts (taxable, tax-free, and tax-deferred) and strategically choosing which accounts to withdraw from, when. Learn more about the tax triangle here.
Tax planning for RMDs is just one piece of a comprehensive retirement plan. Get the complete picture with our free Essential Retirement Planning Guide.
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