What Are RMDs and How Do They Work?
If you are approaching age 73, there is an important retirement rule you should understand: Required Minimum Distributions (RMDs). These are mandatory withdrawals from certain retirement accounts that the IRS requires once you reach a specific age. Failing to follow the rules can result in significant tax penalties, so it is important to understand how RMDs work and how they may affect your retirement income.
This article explains what RMDs are, when they begin, how they are calculated, and how to plan ahead if you are nearing age 73.
What Is a Required Minimum Distribution (RMD)?
A Required Minimum Distribution (RMD) is the minimum amount you must withdraw each year from certain tax-deferred retirement accounts once you reach a specified age.
The IRS requires these withdrawals because retirement accounts like traditional IRAs and 401(k)s allow money to grow tax-deferred. RMDs ensure that taxes are eventually paid on those funds.
RMDs generally apply to the following types of accounts:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- Other employer-sponsored retirement plans
Roth IRAs are not subject to RMDs during the account owner’s lifetime.
Why Age 73 Matters
Under current law, the age when RMDs begin is 73 for individuals born between 1951 and 1959. This change came from the SECURE 2.0 Act of 2022, which gradually increased the starting age for required withdrawals.
If you turn 73 this year, you must begin taking RMDs from your applicable retirement accounts.
Your first RMD must be taken by April 1 of the year following the year you turn 73. However, if you delay your first withdrawal until the following year, you will need to take two distributions in that same year:
- Your first RMD (for the year you turned 73)
- Your second RMD (for the current year), due by December 31
For many retirees, taking the first distribution in the year they turn 73 may help avoid a larger tax bill later.
How RMDs Are Calculated
Your Required Minimum Distribution amount is calculated based on two factors:
- Your retirement account balance at the end of the previous year
- Your life expectancy factor from the IRS Uniform Lifetime Table
The formula is:
RMD = Retirement Account Balance ÷ IRS Life Expectancy Factor
For example:
- Retirement account balance: $500,000
- Life expectancy factor at age 73: 26.5
$500,000 ÷ 26.5 = $18,867.92
In this example, the minimum amount that must be withdrawn for the year would be approximately $18,868.
Each year, the distribution factor changes as you age, meaning your RMD amount will generally increase over time.
Which Accounts Require RMDs?
You must take RMDs separately from each employer-sponsored plan (such as multiple 401(k)s).
However, if you have multiple traditional IRAs, the total RMD can be calculated across all accounts and withdrawn from one or more of them.
Keep in mind:
- Employer plans may have different rules depending on whether you are still working.
- Roth 401(k)s were previously subject to RMDs, but SECURE 2.0 eliminated RMDs for Roth 401(k)s starting in 2024.
A financial professional or tax advisor can help determine the exact amount required from each account.
What Happens If You Miss an RMD?
Failing to take the required amount can lead to penalties.
The SECURE 2.0 Act reduced the penalty for missing an RMD:
- The penalty is 25% of the amount not withdrawn
- If corrected promptly, it may be reduced to 10%
For example, if your required withdrawal was $10,000 and you did not take it, the penalty could be $2,500, plus the income tax owed on the distribution.
Because of this, it is important to plan ahead and track RMD deadlines carefully.
Strategies to Manage RMDs
Although RMDs are mandatory, there are strategies that may help you manage their tax impact.
Plan Withdrawals Carefully
Working with a financial professional may help you structure withdrawals in a way that aligns with your retirement income needs and tax situation.
Consider Qualified Charitable Distributions (QCDs)
If you are age 70½ or older, you may be able to donate directly from your IRA to a qualified charity. A Qualified Charitable Distribution can count toward your RMD while potentially reducing taxable income.
Review Your Tax Bracket
RMDs are considered taxable income, which could affect:
- Your income tax bracket
- Medicare premium surcharges (IRMAA)
- Taxation of Social Security benefits
Planning ahead may help reduce unexpected tax consequences.
Why Planning Ahead Matters
Required Minimum Distributions are an important part of retirement income planning. Understanding when they begin and how they affect your taxes can help you avoid penalties and make informed decisions about your retirement savings.
If you are approaching age 73, it may be a good time to review your retirement accounts, estimate your upcoming RMDs, and discuss your options with a qualified financial professional.
