Required minimum distributions, or RMDs: What you need to know

After a certain age, there are minimum amounts that a retirement plan account owner must withdraw annually. Follow this guide for breakdown and analysis.

Like the Bob Dylan song goes, "The Times They Are a-Changin'." It's been 20 years since the IRS life expectancy tables were updated. Since people are living longer — despite COVID-19 — the new tables are restructured to reflect this trend. Suffice it to say that the new tables lower the amount you're required to take out of covered retirement accounts.

Who's affected?

The rules for required minimum distributions, or RMDs, have changed over the years and, once again, with the newer Secure 2.0 Act of 2022. For many years, the RMD age was 70½ for those reaching age 70½ before 2019. Then the Secure Act of 2019 changed the RMD age to 72 for those reaching 70½ in 2020 or later. Now, under Secure 2.0, the RMD age is 73 for those attaining age 72 after Dec. 31, 2022, and attaining age 73 before Jan. 1, 2033. For those reaching age 74 in 2033 or later, the RMD age will become 75. Also, if you're still working, you can delay taking RMDs from your employer's 401(k) plan until you retire. However, anyone who owns 5% or more of the business sponsoring the retirement plan must begin their RMD based on the new rules, whether they're retired or not. As you probably already know, free lunches aren't truly free. The same is true for money held in your retirement accounts. This includes traditional IRAs, inherited Roth IRAs and qualified employer-sponsored retirement plans such as 401(k), 403(b), SEP IRA, SIMPLE IRA, and the Thrift Savings Plan (TSP) for federal employees and service members. Remember that traditional IRAs and qualified plans are where you put money in before tax, let it grow tax-deferred, and pay tax when you take it out. Roth accounts allow you to put money in after tax, the money grows tax-deferred and it's tax free upon withdrawal — assuming you follow the rules for Roth accounts. Roth accounts for the original owner are not subject to RMD, but "inherited" Roth accounts are subject to RMD, although tax-free. Yes, you must eventually start taking money out of these types of accounts so it can be taxed or distributed to heirs. Note that an RMD isn't the same as spending that money. What you do with the money upon a distribution from a traditional retirement account is up to you, but it will be taxed as the owner's ordinary income. The rules governing RMDs may not be intuitive, but it's still the account owner's responsibility to get them right. Failure to withdraw the correct minimum amount can result in stiff penalties.

How do I calculate my RMD?

• Uniform Lifetime Table (Table III) (Opens in new window) . See note 1 This is the most used table. It's for all unmarried IRA owners calculating their withdrawals, married owners whose spouses aren't more than 10 years younger, and married owners whose spouses aren't the sole beneficiaries of their IRAs.
• Joint Life and Last Survivor Expectancy (Table II) (Opens in new window) . See note 1 This table is used by owners whose spouses are more than 10 years younger and are the IRA's sole beneficiaries.
• Single Life Expectancy (Table I) (Opens in new window) . See note 1 This table is for beneficiaries of the original IRA owner. Be careful with the word “Single” in the title of this table, as it's not for use by unmarried IRA owners, which is Table III.

RMD examples

• Example 1. Ramona is 73, with an IRA balance of $100,000 at the end of the previous year.
  Calculation: Using Table III, the divisor for age 73 is 26.5. So, her RMD is $100,000 / 26.5 = $3,773.58.
  Next Year: At age 74, she will use a divisor of 25.5.
• Example 2. Ramona gets married during the current year and all else remains the same. She would still use Table III, and her RMD for the current year would remain $3,773.58.
• Example 3. Ramona is married, decides to defer her first RMD to April 1 of the next year.
  Calculation:
  First RMD: Due by April 1 of next year, calculated with the previous year-end balance and divisor for age 73 (26.5), which is $3,773.58.
  Second RMD: Due by Dec. 31 of the same year, based on the year-end balance ($106,000) and divisor for age 74 (25.5), which is $4,156.86.
  Total RMDs for the Year: $7,930.44.
• Example 4. Ralph is 73, his spouse is 52, and his IRA balance is $300,000.
  Calculation: Using Table II, Ralph finds his RMD divisor to be 35.1. So, his RMD is $300,000 / 35.1 = $8,547.01.
• Example 5. Fiona is 73, still employed, and owns a traditional 401(k) with $300,000, a Roth IRA with $100,000, and a traditional IRA with $200,000.
  Calculation:
  401(k) RMD: None required while still working.
  Roth IRA RMD: None required, as Roth IRAs do not have RMDs.
  Traditional IRA RMD: $200,000 / 26.5 (from Table III) = $7,547.17.

When an IRA account owner has died, things can get trickier for the person inheriting the account. Because inherited IRAs and RMDs can be confusing, we'll provide a separate article on the topic in the future. In short just know that the rules for inherited IRAs are different for spouses versus other beneficiaries. Also, the type of beneficiary matters. Whether the original owner died before or after starting their own RMDs is important as well. In the meantime, the IRS Publication 590-B is a great guide on these distinctions for inherited IRAs and RMDs. You can also use another online tool such as the Beneficiary Required Minimum Distributions (RMD) calculator (Opens in new window) . See note 1

Other things to consider about RMDs

• Multiple accounts. An owner of multiple IRA or 403(b) accounts must calculate the RMD separately for each account, but the owner can withdraw the RMDs for any of them from any of the others. However, RMDs must be taken from 401(k) and 457(b) accounts.
• Tax planning issues. If you'll be in a lower tax bracket the following year, it may be prudent to delay your first RMD. Although you may not avoid your RMD going forward, you may be able to plan the timing of some of your other income or distributions if you know what your RMD will be.
• Estate planning. Depending on approval by Congress, it may be possible to make a qualified contribution to charity from an IRA as part of, or in lieu of, RMDs. Since RMDs may continue with your heirs, it's important for you to carefully choose who will be responsible for paying the taxes due.
• Penalty for missed RMD? Keep in mind that it's your responsibility to ensure you take the full RMD amount by the deadline. If you don't, any money not withdrawn is taxed at 50%. In this case the account owner should file IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return for the year in which the full amount of the RMD wasn't taken. According to the IRS, the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. To qualify for this relief, you must file Form 5329 and attach a letter of explanation. See the instructions for Form 5329.

Although we can't cover all the regulations, these are just a few situations where RMD rules might trip you up. If you need assistance with the RMD, we encourage you to get help from a financial professional and tax or legal counsel to ensure RMDs are part of your overall retirement income plan.

Call to action:

• Know the rules and get help. If you think your situation may be more complicated, use IRS resources such as the most recent versions of IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) (Opens in new window) See note 1 and Retirement Plan and IRA Required Minimum Distributions FAQ (Opens in new window) . See note 1 Also, consider assistance from a reputable financial advisor and tax or legal counsel.
• Identify all accounts that are subject to RMD. Use the worksheets provided in Form 590-B in the Appendices section, and with the help of the online calculators mentioned earlier.
• Take action. Make your RMD before the deadline and consider the pros and cons of consolidating accounts to make your RMD bookkeeping a bit easier.

Still have questions?

Our Retirement Income Specialists can help.