What is RMD? A Guide to Required Minimum Distributions
Required Minimum Distributions (RMDs) are mandatory withdrawals from certain retirement accounts, set to ensure tax collection on tax-deferred savings. Understanding RMDs is essential for managing taxes, planning income, and optimizing retirement savings.
Introduction to RMDs
Ever wondered why you have to withdraw money from your retirement accounts even if you don’t need it? Welcome to the world of RMDs, or Required Minimum Distributions! These are mandated withdrawals the IRS requires once you reach a certain age, primarily to ensure that taxes are eventually paid on tax-deferred retirement accounts. To learn more about smart retirement withdrawals, see our Retirement Withdrawal Calculator.
When Do RMDs Begin?
Most people must begin taking RMDs from their retirement accounts at age 73, according to recent changes. If you’re newly retired, it’s essential to keep track of your RMD age to avoid penalties. Fun fact: Over 50% of retirees begin withdrawals before they’re required, according to a recent study. For those considering early retirement, check out our article Retire at 55 with 500k for additional planning tips.
First-Year Deferral Option
For those just turning 73, you have a unique choice! Your first RMD can be deferred until April 1 of the following year, which can impact your tax liability, so weigh the pros and cons carefully.
Which Accounts Require RMDs?
RMDs apply to a range of retirement accounts, including Traditional IRAs, 401(k)s, 403(b)s, and more. However, Roth IRAs are exempt from RMDs during the account holder’s lifetime. This is one of the reasons Roth accounts are popular, as they allow retirees to leave funds tax-free for as long as they want. Learn more in our article on Traditional IRA Withdrawal Rules.
How to Calculate Your RMD
Calculating an RMD involves dividing the retirement account balance as of December 31 of the previous year by a life expectancy factor found in IRS tables. The average RMD for retirees with $500,000 in retirement savings at age 73 is about $18,250 per year. The following table provides the life expentancy factors.
| Age | Life Expectancy Factor | Age | Life Expectancy Factor |
|---|---|---|---|
| 72 | 27.4 | 87 | 14.4 |
| 73 | 26.5 | 88 | 13.7 |
| 74 | 25.5 | 89 | 12.9 |
| 75 | 24.6 | 90 | 12.2 |
| 76 | 23.7 | 91 | 11.5 |
| 77 | 22.9 | 92 | 10.8 |
| 78 | 22.0 | 93 | 10.1 |
| 79 | 21.1 | 94 | 9.5 |
| 80 | 20.2 | 95 | 8.9 |
| 81 | 19.4 | 96 | 8.4 |
| 82 | 18.5 | 97 | 7.8 |
| 83 | 17.7 | 98 | 7.3 |
| 84 | 16.8 | 99 | 6.8 |
| 85 | 16.0 | 100 | 6.4 |
| 86 | 15.2 | 101 | 6.0 |
Example Calculation
Let’s say you have $400,000 in a 401(k) at the end of last year and are 73. Using the IRS’s life expectancy factor of 26.5 for this age, your RMD would be $400,000 ÷ 26.5 = $15,094.
Taxes and RMDs
RMDs are taxed as ordinary income, making it essential to understand how withdrawals impact your overall tax situation. State taxes may apply, too, depending on where you live. If you’re aiming to minimize RMD taxes, consider strategies like the Retirement Budgeting method to optimize your withdrawals.
Strategies for Managing RMD Taxes
To manage RMD taxes, consider a Roth conversion or Qualified Charitable Distribution (QCD). Roth conversions can help you lower future RMDs, while QCDs allow you to donate RMDs to charity tax-free, reducing your taxable income.
Penalties for Missing an RMD
If you fail to take an RMD, the IRS penalty can be steep—up to 25% of the amount you failed to withdraw! However, if you missed one by accident, filing Form 5329 and explaining your situation can sometimes get the penalty waived. For those managing complex retirement portfolios, this is crucial.
How RMDs Affect Retirement Planning
RMDs impact retirement income planning and tax strategy. If you’re not careful, RMDs can push you into a higher tax bracket or impact Medicare premiums. To better strategize around RMDs, check out our Retirement Planning Mistakes guide.
Special Considerations for Beneficiaries
Beneficiaries of retirement accounts also face RMDs, but the rules vary. The SECURE Act requires non-spousal beneficiaries to fully withdraw inherited accounts within 10 years. Spouses, on the other hand, have more options to roll the account into their own IRA or treat it as inherited.
Strategies for Managing and Reducing RMDs
To reduce future RMDs, consider a Roth IRA conversion, or plan QCDs for tax-free donations. For example, if you’re age 70½ or older, QCDs can satisfy RMD requirements up to $100,000 annually, which can be a big win tax-wise.
FAQs on RMDs
What if I work past age 73?
If you’re still working, your current employer-sponsored plan may allow you to defer RMDs until retirement. For those considering working longer, see our article on Canadian Retirement Age.
Do Roth 401(k)s have RMDs?
Yes, Roth 401(k)s are subject to RMDs, though rolling funds into a Roth IRA can help avoid these withdrawals entirely.
Fun Facts
- RMDs became mandatory in 1986 as part of tax policy changes under the Tax Reform Act.
- According to Fidelity, only about 1 in 5 retirees use their RMDs for essential expenses—the rest save, invest, or gift it.
- As of 2023, individuals 73 and older are estimated to hold over $6 trillion in IRAs and 401(k) accounts in the U.S.
- The penalty for missed RMDs used to be 50% before the SECURE 2.0 Act reduced it to 25%.
Conclusion
Understanding RMDs is essential for anyone managing retirement income. These required withdrawals impact taxes, budgeting, and retirement security. By planning ahead, using strategies like QCDs, Roth conversions, and the Retirementize calculator, you can minimize RMD tax impacts and make the most of your retirement savings.