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The required minimum distribution (RMD) rule is something everyone should be familiar with. Once you reach a specific age, the Internal Revenue Service (IRS) requires you to start withdrawing from your traditional IRA, traditional 401(k), and a number of other employer-sponsored retirement plans. In 2023, the age to start taking RMDs rose from 72 to 73.
One exception: If you are still employed at age 73 or older, you do not owe an RMD on your 401(k) or similar retirement plan at the employer where you currently work. You do owe RMDs on any other 401(k)s, IRAs, or similar tax-advantaged plans that you have accumulated over time.
What do these rules mean to you financially in your retirement years? Here’s a look at how RMDs work.
Example of a RMD
John is a retired accountant who has just turned 76 and has $500,000 in a traditional IRA. He’d love to leave the money untouched but knows that tax laws dictate that he must withdraw at least some of it and add it to his taxable income. If he fails to do this, he’ll take a much larger tax hit in penalties.
Looking at an IRS-provided chart, John sees that he’ll need to withdraw $21,097. He arrives at this figure by referencing that chart, which lists 23.7 as the life expectancy factor for his age—his magic number. John divides his balance of $500,000 by that factor. The resulting number, 21,097, is his RMD, or the amount he must withdraw from his IRA.
RMDs apply to most tax-advantaged retirement accounts, including traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and 403(b)s. Even if you have inherited a retirement account, it’s still subject to a RMD. (Roth IRAs are not subject to RMDs in the owner’s lifetime, but heirs will have to take them.)
While your first RMD can be delayed until April 1 of the year after you turn 73, subsequent RMDs must be taken by Dec. 31 of each year. This means that if you delay the first RMD until the following year, you'll have to take two RMDs in that year.
Failing to take the required RMD amount by the deadline can result in a substantial penalty. Until recently, the penalty was a 50% excise tax on the amount not withdrawn. Now, thanks to the SECURE Act 2.0, which went into effect this year, this penalty has been reduced to 25% of the minimum amount that should’ve been withdrawn but wasn’t.
A financial advisor or a tax professional can help you sort through the ins and outs of RMDs as they relate to your retirement savings and overall portfolio.
How is a RMD calculated?
RMDs are based on your retirement account balance and a life expectancy factor provided by the IRS. The calculation is meant to ensure that you gradually distribute and use the funds in your tax-advantaged retirement accounts over your lifetime. The formula works like this:
- Determine your account balance, which is usually based on its value as of Dec. 31 of the previous year.
- Choose a life expectancy factor (known as the distribution period) based on IRS tables.
- Divide your retirement account balance by the distribution period for your age. This is your RMD.
It’s important to note that your RMD is recalculated each year. This is because as you get older, the life expectancy factor decreases, which means you'll need to withdraw a larger percentage of your account balance.
If your retirement account is with an investment firm, such as J P. Morgan, its financial advisors can generally calculate what you owe. Just be sure to contact the company in time to have the funds transferred by the end of the tax year.
What are life expectancy charts?
Life expectancy charts are provided by the IRS to help individuals calculate RMDs from their employer-sponsored retirement plans. There are three types of charts:
- The Single Life Expectancy Table is used by beneficiaries who are not the spouse of the IRA owner.
- The Joint Life and Last Survivor Expectancy Table is used by married individuals whose spouses are more than 10 years younger and are the sole beneficiary of the account.
- The Uniform Lifetime Table is used by unmarried retirement account owners calculating their own withdrawals, married individuals whose spouses aren’t more than 10 years younger, and married individuals whose spouses aren’t the sole beneficiaries of their retirement account.
IRA required minimum distribution (RMD) table
The Uniform Lifetime Table is the one most commonly used to calculate RMDs. Here is the most recent version of this table (for use by: unmarried owners; married owners whole spouses aren't more than 10 years younger; and married owners whose spouses aren't the sole beneficiaries of their IRAs):
|Age||Distribution period||Age||Distribution period|
120 and over
Source: Internal Revenue Service
Generally, you have until Dec. 31 to take each year's RMD. If you haven’t withdrawn the full RMD by then, the sum not withdrawn is taxed at 25%. This penalty can drop to 10% if you correct the RMD within two years and file IRS Form 5329 with your federal tax return.
TIME Stamp: Knowing the RMD rules can save you a fortune
If you’ve spent your career building a nest egg, take care not to undo some of that hard work in retirement because you failed to make the RMD. The newest legislation substantially lowers the penalties, but the easiest way to avoid them altogether is to get familiar with RMD figures as they apply to your savings. An hour or so of study and planning will keep thousands of dollars in your pocket.
Frequently asked questions (FAQs)
What are inherited IRAs and how are they subject to RMDs?
An inherited IRA passes to the beneficiary after the original account holder's death. They are subject to RMDs that dictate how beneficiaries must withdraw funds over time.
Commonly, the beneficiary is the spouse of the original account owner. They have the option to treat the inherited IRA as their own or roll it over into their personal IRA. If they choose this option, regular RMD rules for traditional IRAs apply.
Non-spouse beneficiaries such as children face different RMD rules. Generally, they must start taking RMDs from the inherited IRA by Dec. 31 of the year following the original account owner's death and potentially withdraw all the funds within 10 years.
What are the SECURE Act 2.0 changes to RMD rules?
Signed into law by President Biden on Dec. 29, the SECURE Act 2.0 includes several changes to rules regarding RMDs that build on provisions in the SECURE Act of 2019. They are:
- Retirement account owners may now delay their RMDs to age 73 and, starting in 2033, as late as age 75.
- Participants in Roth employer plans such as 401(k)s no longer have to take lifetime RMDs from these accounts.
- Tax penalties for not taking (or taking less than) your RMD due for the year have been reduced.
What is the mandatory withdrawal rate at age 73 and how much money do I have to take out of my 401(k)?
The withdrawal rate comes from dividing your account balance by the distribution period for your age, which is based on life expectancy. In the Uniform Lifetime Table, the distribution period for a 73-year-old is 26.5, which means you would arrive at your RMD by dividing your account balance by this number. If you have $1 million in retirement savings, your RMD for the year would be $37,736.
At what age do RMDs stop?
There is no upper age limit for when RMDs stop. IRS tables cover age 120 and above, and the oldest person living in the United States as of August 2023 was 115.
What is the RMD percentage for 2023?
The RMD percentage stems from your distribution period, which is a number you divide into your retirement account balance that is generated by the IRS based on your status and age. In the Uniform Lifetime Table, this number runs from 27.4 (age 72) to 2.0 (age 120 and older). Keep in mind that the distribution period changes every year.
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