What are the Minimum Required Distributions, or RMDs?
The IRS spends a lot of energy making sure people don’t use up their retirement accounts, imposing taxes and penalties on most early withdrawals. So it might surprise you to learn that at some point the agency forces you to withdraw money from your account via the minimum required distributions.
These distributions, often referred to as RMD, are primarily applied to tax-deferred retirement accounts: work plans such as 401 (k) s and 403 (b) s, as well as traditional individual retirement accounts and pension plans. self-employed, including IRA SIMPLE and SEP. Roth 401 (k) accounts are also subject to RMDs.
Minimum Required Distribution Rules (RMD)
RMDs are a minimum amount that you must withdraw from your retirement account each year before December 31, usually from the year you turn 72. (The age of RMDs was increased by 70½ years under the Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, which was passed in late 2019.) There are a few exceptions:
The IRS gives you a little leeway in the first year: you have until April 1 of the year following the year you turn 72 to spend your first RMD. However, using that extra time means you will need to take two RMDs in a year – one for the year you turn 72 and one for the current year.
Distributions from 401 (k), 403 (b) and other defined contribution or profit sharing plans may be deferred until your effective retirement, if you are still working at age 72.
If you skip a required distribution or don’t take enough, there is a very hefty penalty: when you file taxes, you will owe 50% of the undistributed amount.
Other important things to know: You can always withdraw more than the minimum – this is a floor, not a ceiling – and unless the money you withdraw has already been taxed, these distributions will be taxable as income in the year you receive it. In other words, this is an opportunity for the IRS to start collecting any taxes you may have deferred.
How RMDs are calculated
RMDs are calculated using simple math – just kidding! This is the IRS we are talking about.
To calculate your minimum retirement distribution for the current year, divide your account balance at the end of the last year by a distribution period based on your age. These periods are available in two tables:
If you are married and the only beneficiary in your account is your spouse and they are more than 10 years younger than you, you will use the Joint table and last survivor.
You can also skip this song and dance and use our RMD calculator below.
RMD when you have multiple accounts
If you have more than one retirement account subject to RMD, you will need to calculate the distribution for each account separately. However, if you have more than one IRA, the IRS allows you to withdraw your total RMD IRA from just one of them.
The same rule applies if you have more than one 403 (b) plan. But if you have multiple 401 (k) or 457 (b), you need to withdraw one RMD from each account separately.
If you need help keeping control of your accounts and maximizing your retirement plan, you may want to find an advisor who meets your needs.