What to Know About Calculating RMDs
Required minimum distributions (RMDs) are withdrawals you have to make from most retirement plans (excluding Roth IRAs). The age for withdrawing from retirement accounts was increased in 2020 to 72 from 70.5. The SECURE 2.0 Act, though, raised the age for RMDs to 73 for those who turn 72 in 2023. Therefore, your first RMD must be taken by April 1 of the year after which you turn 72 (73 in 2023). The amount you must withdraw depends on the balance in your account and your life expectancy as defined by the IRS. If you have more than one retirement account, you can take a distribution from each account or you can total your RMD amounts and take the distribution from one or more of the accounts. RMDs for a given year must be taken by December 31 of that year, though you get more time the first year you are required to take an RMD. If you have questions about retirement income planning, a financial advisor can help.
What Is a Required Minimum Distribution (RMD)?
An RMD is the minimum amount of money you must withdraw from a tax-deferred retirement plan and pay ordinary income tax rates. The age to begin RMDs is 73 now, per the SECURE 2.0 Act.
Once you reach this milestone, you generally must take an RMD each year by December 31. We’ll explain the exceptions and how to calculate RMDs. But first, let’s see what types of plans require RMDs and which don’t. RMDs apply to the following retirement plans:
Traditional IRAs
Most 401(k) and 403(b) plans
Most small business accounts
However, RMDs don’t apply to Roth IRAs, because contributions to these accounts are with after-tax dollars. That said, RMDs do apply to inherited IRAs.
RMD Tables
To calculate your RMD, start by visiting the IRS website and accessing IRS Publication 590. This document has the RMD tables (example below) that you will use to calculate your RMD. Then, take the following steps:
Locate your age on the IRS Uniform Lifetime Table
Find the “life expectancy factor” that corresponds to your age
Divide your retirement account balance as of December 31 of the previous year by your current life expectancy factor
IRS Uniform Lifetime Table Age Distribution Period in Years 72 27.4 73 26.5 74 25.5 75 24.6 76 23.7 77 22.9 78 22.0 79 21.1 80 20.2 81 19.4 82 18.5 83 17.7 84 16.8 85 16.0 86 15.2 87 14.4 88 13.7 89 12.9 90 12.2 91 11.5 92 10.8 93 10.1 94 9.5 95 8.9 96 8.4 97 7.8 98 7.3 99 6.8 100 6.4 101 6.0 102 5.6 103 5.2 104 4.9 105 4.6 106 4.3 107 4.1 108 3.9 109 3.7 110 3.5 111 3.4 112 3.3 113 3.1 114 3.0 115 2.9 116 2.8 117 2.7 118 2.5 119 2.3 120 and over 2.0
So, let’s say you just turned 78. If your IRA balance was $100,000, your RMD for the year would be $4,545.45.
Take note that calculating your RMD works a bit differently if your spouse is the only primary beneficiary to your account and is more than 10 years younger than you. In this case, you must use the IRS Joint Life and Last Survivor Expectancy Table. You can also find this on IRS Publication 590. However, your life expectancy factor would be based on the ages of you and your spouse. But the formula doesn’t change. You’d still follow the same IRA withdraw rules listed above.
If you have multiple retirement plans such as a 401(k) and a traditional IRA you need to calculate RMDs for each plan separately. However, you can combine your RMDs and withdraw the total amount from just one plan or from any combination of the plans you own. You likely want to do this if it’s more advantageous for you to draw down certain accounts or investments before others. For guidance, consult a financial advisor, who can also help you avoid steep IRS penalties for taking RMDs that are too small.
RMD Deadlines and Exceptions
The first year you are required to take an RMD, you can delay making the withdrawal until April 1 of the following year. But you’ll need to take another RMD by December 31 of that year. So you may not want to take two RMDs in one year since they count as taxable income – and may together put you in a higher tax bracket. A tax professional can help you with this decision while a financial advisor with tax expertise can also help you figure out where and in what order to draw down your accounts.
Another way you can delay taking your RMD is if you still work at the company that sponsors your 401(k) plan or another employer-sponsored account. As long as you don’t own 5% or more of that company, you can delay making your first RMD until after you retire. But if you leave that company after you turn 73, you must start taking RMDs. To calculate your 401(k) RMD, you would use the same tables and take the same steps as you would for calculating your traditional IRA RMDs.
RMDs and Inherited IRAs
If you’ve inherited an IRA, the RMD rules you must follow depend on your relationship to the original deceased owner. There are three general types of inheritors: a spouse, a non-spouse (such as a son or daughter) and an entity such as a trust or non-profit organization. It’s important to know the RMD rules behind these accounts in order to avoid the top mistakes people make when inheriting retirement accounts.
Let’s start with the rules for a spousal inheritor, who has rights not granted to all other types of beneficiaries.
RMD Rules When a Spouse Inherits a Traditional IRA
If you inherit an IRA from your deceased partner, you can roll over the assets into your own IRA. Or, you can rollover the assets into what is known as an inherited IRA as all other types of beneficiaries can. If you rollover assets into your own IRA, you can use the favorable Uniform Life Expectancy Table to calculate RMDs after you turn 73.
In addition, you get another exclusive benefit. If you’re older than 59.5, you can begin withdrawing money from your IRA without facing the 10% IRS early-withdrawal penalty. And if you want to start taking distributions under the age of 59.5, you can also roll over the assets into an inherited IRA to avoid the 10% IRS early-withdrawal penalty.
RMDs for an inherited IRA is based on your age and life expectancy factor in the IRS Single Life Expectancy Table. But you will need to start taking RMDs from an inherited IRA depending on the age of your spouse at the time of his or her death. We explain below:
If your spouse was older than 72 or turned 72 in 2023, start taking RMDs by December 31 on the year after your spouse’s death.
If your spouse was younger than 72 or turned 72 in 2023, you can delay RMDs until your spouse would have reached age 72, or 73 if they turned 72 in 2023.
RMD rules can get complicated quickly. Consult with a financial advisor to figure out the best strategy for your specific situation.
RMD Rules When a Non-Spouse Inherits a Traditional IRA
The SECURE 2.0 Act raised the age for RMDs to 73 for those who turn 72 in 2023 or later. This retirement legislation expands the SECURE Act, which passed at the end of 2019 and raised the RMD age from 70.5 to 72. The SECURE Act also essentially eliminated the “stretch IRA” option for non-spouse inheritors of IRAs. The law now requires these non-spouse beneficiaries to take full payouts within 10 years after the death of the initial account owner. However, they won’t have to meet any other distribution requirements within that time frame.
Moreover, this rule won’t apply to minors until they reach the age of maturity. At that point, they’d have ten years to take a full payout from the account. The new rules also won’t apply to individuals who are disabled or chronically ill under government definitions. Beneficiaries who are not more than 10 years younger than the original account holder at the time of death are also spared.
Under these circumstances, you’d be allowed to take RMDs based on the old rules. We lay these out below. You’d generally have to start taking RMDs by December 31 of the year following the death of the original account owner.
You would use the IRS Single Life Expectancy Table to calculate your first RMD. If the original owner died on or after reaching age 73, you would use the lower of the following along with its corresponding life expectancy factor.
Beneficiary’s age
Owner’s age at their birthday for the year of death
The IRS then requires you to subtract 1 from this initial life expectancy factor when calculating RMDs for each following year. You can also take the owner’s RMD during the year of his or her death.
But what if the account owner died before reaching age 73? In this case, you would use what your own age would be at the end of the year following the year of the original account owner’s death to figure out the life expectancy factor. You then subtract 1 from the initial life expectancy factor when calculating additional RMDs.
In the case of multiple non-spouse beneficiaries, each one would have to set up an inherited IRA by December 31 following the year the original account owner died. Those who fail to do so would generally need to calculate their RMDs based on the oldest remaining beneficiary as of December 31.
RMD Rules When an Entity Inherits a Traditional IRA
If you have a traditional IRA, you can designate a beneficiary to be an entity instead of an individual. Examples include trusts, charities, and certain organizations. However, this doesn’t mean they avoid RMD rules. In this case, the RMD depends on the age of the original account owner upon death.
So let’s say the original account owner was still alive by April 1 following the year he or she reached age 73. In this instance, RMDs will be calculated based on the life expectancy factor of the original owner using the IRS Single Life Expectancy table.
Now, consider the account owner died before turning age 73. In this case, the entity must withdraw the entire balance in the account within five years following the year of death.
However, exclusive rules apply to Look-Through Trusts. You should consult a financial advisor and tax professional for specific guidelines on how the IRS treats RMDs in this case.
RMDs and Inherited Roth IRAs
One of the major advantages to investing in a Roth IRA is that you can keep your money in the plan indefinitely. The IRS doesn’t impose RMDs on these accounts as long as you’re alive. That may change, however, when you pass away and someone inherits your assets.
RMD Rules When a Spouse Inherits a Roth IRA
Under IRS rules, a surviving spouse who inherits a Roth IRA can treat the account as his or her own. This means RMDs won’t come into play. So it’s best to roll over the inherited Roth IRA as soon as possible if the process isn’t automatic under the original owner’s agreement.
RMD Rules When a Non-Spouse Inherits a Roth IRA
If you’ve inherited a Roth IRA as a non-spouse beneficiary, you must follow the same 10-year rule that applies to inherited traditional IRAs.
RMDs and Inherited 401(k)s
By law, the beneficiary to your 401(k) account must be your spouse unless you’re single or your spouse signs a waiver. If you inherit a 401(k) from a deceased spouse, you can leave it in the plan as long as the company sponsoring it allows it. Or you can roll over the assets into an inherited IRA. In this case, you will be subject to the RMD rules that apply to spousal inherited IRAs as described above. Likewise, a non-spousal beneficiary who rolls over inherited 401(k) assets into an inherited IRA will abide by the applicable RMD rules stated above.
Keep in mind, however, that some companies impose stricter restrictions on how money in their employees’ 401(k) plans can be moved around. Some, for instance, may require beneficiaries to take the money out of the account in a lump sum or over the course of five years. You should contact the plan administrator for complete plan rules.
In addition, state laws may affect inherited 401(k) assets as well. And depending on how much is in the account, estate and inheritance tax laws may come into play as well. In the case of handling inherited 401(k) assets, a financial advisor can help.
What If I Withdraw Too Little or Don’t Take an RMD?
If you don’t make a proper RMD by the appropriate deadline, Uncle Sam will hit you with tax penalties. This will come in form of 50% of the difference between the amount you withdrew that year and the amount you were supposed to take out that year.
However, you don’t have to take your RMD withdrawals as one lump sum. You can take it in increments throughout the year. Just make sure you withdraw the total RMD amount for the year by December 31. In some cases, however, you can delay RMDs.
How to Avoid RMDs
If you fail to take an RMD on time, you will have to pay a 50% tax on the amount you should have withdrawn. However, one easy and perfectly legal way to avoid RMDs is to roll over your IRA or 401(k) assets into a Roth IRA or Roth 401(k). You’ll have a bigger tax bill the year you do it, but the IRS will not require you to take RMDs from these accounts.
Theoretically, you can leave money in a Roth IRA or Roth 401(k) until your death, and it can continue growing tax-free. But as long as your assets have been in these accounts for at least five years, you can make tax-free and penalty-free distributions after reaching age 59.5. And at any time, you can withdraw your own contributions penalty and tax-free.
Bottom Line
An RMD is the minimum amount of money you must withdraw annually from your qualified retirement plans after reaching age 73. Note that the SECURE 2.0 Act has raised the age for RMDs to 73 for those who turn 72 in 2023. Calculating your RMD can be as simple as looking at a table and grabbing a calculator. Remember, you have the entire year to meet your RMD.
Tips on Retirement Income Planning
A financial advisor or tax advisor can be a big help in putting together a retirement income plan that accounts for living expenses, taxes and other considerations. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
To avoid a stiff penalty, make sure you withdraw your RMDs by the appropriate deadline. But don’t worry. Most people satisfy their RMDs and then some within a given year. And to help you avoid some pitfalls, our retirement experts published a report on tips for understanding required minimum distribution rules.
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