What Is a Required Minimum Distribution (RMD)?
Let me explain what a required minimum distribution, or RMD, really means for you. It's the minimum amount you have to pull out each year from specific retirement accounts like traditional IRAs, 401(k)s, SEP IRAs, and SIMPLE IRAs once you hit age 73. You need to start by April 1 of the year after turning 73, and then continue annually by December 31. If you don't, the IRS hits you with a penalty. Roth accounts are different—they don't require RMDs until after the owner passes away.
Understanding RMDs
To figure out your RMD, you divide the fair market value of your account as of December 31 of the previous year by a life expectancy factor from IRS tables. Your account custodian can help with this, or you can do it yourself using the latest worksheets—make sure they're up to date because life expectancies change. Different tables apply in certain cases, like if your spouse is the sole beneficiary and more than 10 years younger than you. For a traditional IRA, grab the balance from last year-end, find your age factor (it drops as you age, from about 27.4 down to 1.9), and divide to get your RMD. Remember, you can always take more than the minimum if you want.
Special Considerations
There are exceptions you should know about. For Roth accounts, RMDs only kick in after the owner's death. If you're still working past 73, some qualified plans let you delay RMDs until retirement, but this is for your current employer's plan, not old ones or IRAs—check with your employer. Taking RMDs might push you into a higher tax bracket, so look into strategies like state tax breaks to soften the blow. And yes, you can withdraw everything in one go if you choose, but watch out for the tax hit.
RMDs and Inherited IRAs
Inherited IRAs have their own rules, and they're important if you're dealing with one. If you're a designated beneficiary and the owner died before 2020, you use the Single Life Table for your RMD. But for deaths after December 31, 2019, the SECURE Act changes things based on whether you're an eligible designated beneficiary, designated, or non-designated. Some must empty the account within 10 years, others within five—this kills the old stretch IRA strategy. If it's the year of death, use what the owner would have taken. Rules vary if you're a spouse, minor child, or disabled. Dive into IRS Publication 590-B for the details on inherited distributions.
Example of an RMD
Here's a straightforward example to show you how it works. Say you're 74, and your IRA was worth $205,000 at the end of last year. Using the Uniform Lifetime Table, your factor is 25.5. Divide $205,000 by 25.5, and you get about $8,039—that's your minimum withdrawal for the year. You can take it all at once by December 31 or spread it out. If you have multiple IRAs, calculate each RMD separately, but you might be able to pull the total from one account. Your custodian usually handles the math, so you don't have to sweat it.
RMD FAQs
- When do RMDs start? They begin at age 73, up from 72 before 2023 and 70½ before 2020.
- Are RMDs taxed? Yes, since they're from pre-tax accounts, you pay income tax at your current rate.
- What if I skip my RMD? You'll face a 25% penalty on the amount not withdrawn, down to 10% if fixed within two years.
- Do Roth IRAs have RMDs? No, not during your lifetime—only for beneficiaries.
- Why does the IRS require RMDs? To ensure you pay the deferred taxes on those pre-tax contributions.
The Bottom Line
RMDs exist to make sure you don't dodge taxes on your retirement savings forever. Most people start withdrawing earlier because they need the money, but if not, you calculate by dividing last year's account value by the IRS factor and take it by year-end. Miss it, and it's a 25% penalty. Use the IRS worksheets, and stay on top of rules for multiple accounts or inheritances—they can get tricky.
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