Once you reach a certain age, you are required to start withdrawing money from certain retirement accounts. This is known as required minimum distributions, or RMDs, and is an important concept for retirees to know, especially those who are approaching their 70s with no immediate plans to take any money out of their retirement savings.
With that in mind, here’s a primer on RMD rules: what accounts have RMDs, when you need to start withdrawing money, how much to take out, and more.
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Which accounts are subject to RMDs?
The short explanation is that retirement plans for which you received a tax break for your contributions are subject to RMD requirements. These are also referred to as pre-tax retirement accounts.
This includes, but is not limited to:
- Traditional IRAs
- SEP-IRAs (non-Roth)
- SIMPLE IRAs (non-Roth)
- Most 401(k) plans
- Most 403(b) plans
- Most 457 plans
- Thrift Savings Plans
The general idea of RMDs is that these accounts are tax-deferred, not tax-free. The government gave you a tax deduction for your contributions but eventually wants its cut of the money. And that’s where RMDs come in. At some point you have to start taking money, which will be taxable income, out of the account.
Any Roth accounts, including Roth 401(k) and others, are not subject to RMD rules. Contributions to Roth accounts are not tax-deductible when they’re made, but qualifying withdrawals are not taxable, and therefore the IRS doesn’t care when you take the money out.
How RMDs work
Fortunately, the RMD rules are pretty straightforward. There are two different RMD rules that are important to understand: when they start, and how much you’ll need to take out each year.
First, the age at which you must start taking RMDs has increased in recent years. Now, you need to take your first RMD when you turn 73. You can withdraw your first RMD as late as April 1 of the year after you turn 73, and subsequent RMDs must be taken by Dec. 31 each year thereafter.
However, I’d caution you to think twice about waiting until the last minute to take your first RMD. Think of it this way. If you take your 73-year-old RMD on April 1 of the following year, you’d still have to take your 74-year-old RMD by the end of the same calendar year. That’s two years’ worth of taxable withdrawals taking place within the same year. There could certainly be good reasons for doing this but be aware that the “double RMD” this would create could potentially bump you into a higher marginal tax bracket.
How much is your RMD?
You can calculate your RMD easily, if you know what to use. You’ll need two pieces of information:
- Your account balance as of Dec. 31 of the prior year. You can usually use your year-end statement to find this.
- Your life expectancy factor, as published in IRS tables, which can be found here (in Appendix B). Most people will use the Uniform Lifetime Table, unless your sole beneficiary is your spouse who is more than 10 years younger than you. In that case, you’d use the Joint and Last Survivor Life Expectancy table.
To calculate your RMD each year, you’d simply divide your year-end account balance by the appropriate life expectancy factor.
For example, if you are turning 75 in 2025 and your 401(k) balance was $700,000 at the end of last year, you’d use a factor of 24.6 from the Uniform Lifetime Table. Dividing the two numbers shows an RMD of $28,455, which must be withdrawn by the end of the year.
What to do if you don’t need the money
First, if you don’t need the money, you should still take your RMDs each year. The penalties for not taking an RMD are rather harsh.
Of course, if you don’t need the money to fund your lifestyle in retirement, it’s certainly a good problem to have. And there are several things you can consider doing with the money that are more effective strategies that simply not taking your RMD and eating the penalty.
For example, you could simply put the money into your regular brokerage account, and you can even buy the same investments you sold to complete your RMD if you want. You may be able to even transfer assets directly from your pre-tax retirement account to a taxable brokerage account to fulfil your RMD requirement. Or, you could donate the money to charity to avoid the tax sting of an unneeded RMD, and there are several strategies retirees could use. A qualified charitable distribution, or QCD, can be especially effective.
The bottom line is that you should absolutely take your RMD, even if you don’t need the money. There are several ways to put the money to work, either for you or for the causes you care about.