How Required Minimum Distributions Work for IRAs and 401(k) Plans
For many years, retirement savers are encouraged to put money into tax-deferred accounts and let it grow. Eventually, the IRS requires that some of that money come out. These yearly withdrawals are called required minimum distributions, or RMDs.
A required minimum distribution is the minimum amount a person must withdraw each year from certain retirement accounts once they reach a specific age. The rule exists because contributions to these accounts were often made before taxes. RMDs ensure that the government eventually collects income tax on that money.
RMDs apply to many common retirement accounts. These include traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer plans such as 401(k), 403(b), and most 457(b) plans. The rules for each account type are similar, but there are some important differences.
Roth IRAs work differently. The original owner of a Roth IRA does not have to take RMDs during their lifetime. Starting in 2024, Roth accounts inside employer plans, such as Roth 401(k)s, are also exempt from lifetime RMDs.
The age when RMDs begin has changed in recent years. Under the SECURE 2.0 Act, the starting age is currently 73. It is scheduled to rise to 75 in 2033 for people born in 1960 or later.
Missing a required minimum distribution can trigger a steep IRS penalty, so tracking deadlines is essential.
The first RMD has a special deadline. It must be taken by April 1 of the year after a person reaches their starting age. After that, each RMD must be taken by December 31 of each year.
Delaying the first RMD until April can create a tax issue. That person would then need to take two RMDs in the same calendar year. Taking two distributions in one year may push them into a higher tax bracket.
The amount of each RMD is based on two factors. The first is the account balance on December 31 of the previous year. The second is a life expectancy factor from tables published by the IRS.
Most people use the IRS Uniform Lifetime Table. To find the RMD, the prior year-end balance is divided by the distribution period listed for the person's age. As a person gets older, the distribution period gets shorter, so the required percentage increases.
A different table may apply in some cases. If a spouse is the sole beneficiary and is more than ten years younger, the account owner can use the Joint Life and Last Survivor Table. This usually results in a smaller required withdrawal.
People with more than one retirement account need to understand how RMDs are combined. The RMD for each traditional IRA must be calculated separately. However, the total can be withdrawn from one IRA or spread across several.
Employer plans follow stricter rules. In most cases, the RMD for each 401(k) must be taken from that specific account. 403(b) accounts are an exception and can generally be combined with each other.
There is an exception for people who are still working. Many employer plans allow employees to delay RMDs from their current employer's plan until they retire. This exception does not apply to IRAs or to people who own more than 5 percent of the company.
RMDs are generally taxed as ordinary income. This can affect a retiree's tax bracket and the taxation of Social Security benefits. It may also affect Medicare premiums for higher-income retirees.
The penalty for missing an RMD is significant. Under current law, the IRS can charge an excise tax of 25 percent of the amount that should have been withdrawn. If the mistake is corrected promptly, often within two years, the penalty may drop to 10 percent.
In some cases, the IRS may waive the penalty entirely. This usually requires showing that the missed distribution was due to a reasonable error and that steps were taken to correct it. Filing the proper tax form and explaining the situation is part of this process.
Charitable giving offers one way to manage RMD taxes. People age 70 and a half or older can make a qualified charitable distribution, or QCD, directly from an IRA to a qualified charity. A QCD can count toward the RMD and is not included in taxable income, up to an annual limit.
Inherited retirement accounts follow separate rules. Many non-spouse beneficiaries must empty an inherited account within ten years. Some may also need to take yearly distributions during that period.
Planning ahead can make RMDs easier to manage. Some retirees take withdrawals monthly or quarterly instead of all at once. Others set up automatic distributions with their account provider.
Required minimum distributions are an important part of retirement income planning. Understanding when they start, how they are calculated, and how they are taxed helps retirees avoid costly mistakes. A financial advisor or tax professional can help create a strategy that fits each person's goals and needs.
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