A Required Minimum Distribution (RMD) is the minimum amount that retirement account holders must withdraw annually from their tax-deferred retirement accounts, starting at a certain age. The purpose of RMDs is to ensure that individuals eventually pay taxes on the funds they have saved in these accounts, rather than deferring taxes indefinitely.

Key Points About RMDs:

  1. Applicable Accounts:
    • Traditional IRAs
    • SEP IRAs
    • SIMPLE IRAs
    • 401(k) plans
    • 403(b) plans
    • 457(b) plans
    • Other defined contribution plans

    Roth IRAs do not require RMDs during the account owner’s lifetime.

  2. Age for Starting RMDs:
    • The age at which RMDs must begin was changed by the SECURE Act 2.0 (2022).
    • For those born in 1951–1959, RMDs must begin at age 73.
    • For those born in 1960 or later, RMDs must begin at age 75.
  3. Calculating RMDs:
    • The RMD amount is calculated by dividing the account balance as of December 31 of the previous year by a life expectancy factor provided by the IRS in their Uniform Lifetime Table (or Joint Life Expectancy Table if the spouse is the sole beneficiary and is more than 10 years younger).
    • Formula:
  4. Deadlines:
    • The first RMD must be taken by April 1 of the year following the year you reach the required age (e.g., age 73 or 75).
    • Subsequent RMDs must be taken by December 31 of each year.
  5. Tax Implications:
    • RMDs are taxed as ordinary income in the year they are withdrawn.
    • Failure to take the full RMD amount results in a 50% excise tax on the amount not withdrawn.
  6. Exceptions:
    • Roth IRAs do not require RMDs during the account owner’s lifetime.
    • If you are still working at the RMD age and do not own more than 5% of the company, you may delay RMDs from your current employer’s 401(k) plan until retirement.

Example Calculation:

If you are 75 years old with a retirement account balance of $500,000 as of December 31 of the previous year, and the IRS life expectancy factor for age 75 is 24.6, your RMD would be:

RMD = $500,000 24.6 = $20,325

Planning Tips:

  • Consider the tax impact of RMDs and plan withdrawals strategically.
  • If you don’t need the funds, you can donate up to $100,000 of your RMD directly to a qualified charity (Qualified Charitable Distribution, or QCD) to satisfy the RMD requirement without incurring taxable income.

Always consult a financial advisor or tax professional to ensure compliance with RMD rules and to optimize your retirement strategy.