What Is the Minimum Required Distribution?
Understand the principles governing mandatory withdrawals from your retirement accounts and how they function within your overall financial plan.
A Required Minimum Distribution (RMD) is the amount of money federal law requires you to withdraw annually from certain retirement accounts. The government allows tax-deferred growth to encourage retirement savings, but it eventually needs to collect tax revenue on those funds. RMDs force the distribution of these funds, making them part of your taxable income for the year. These distributions are mandatory once you reach a specific age, ensuring that retirement savings are eventually used and taxed. While you can always withdraw more than the minimum, failing to take the RMD can lead to penalties.
Accounts Subject to RMDs
The requirement to take RMDs begins when you reach a specific age. Following the SECURE 2.0 Act, if you reach age 73 in the current year, you must take your first RMD by April 1 of the following year. If you delay this first distribution until the April 1 deadline, you must take a second distribution for the current year by December 31, resulting in two RMDs in the same tax year.
RMD rules apply to most tax-deferred retirement plans funded with pre-tax dollars. These include:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- Governmental 457(b) plans
Roth accounts are exempt from RMDs for the original owner because contributions are made with after-tax money. This exemption applies to Roth IRAs as well as the Roth portions of employer-sponsored plans like Roth 401(k)s. However, beneficiaries of Roth accounts are subject to distribution rules after the original owner’s death.
Calculating Your RMD Amount
Calculating your RMD involves a simple formula: your prior year-end account balance divided by a life expectancy factor. The account balance is its fair market value as of December 31 of the preceding year, a figure your financial institution will report to you.
The life expectancy factor is found in IRS Publication 590-B. Most account owners use the Uniform Lifetime Table, which provides a distribution period based on your age. A different table, the Joint Life and Last Survivor Expectancy Table, is used only if your sole beneficiary is a spouse who is more than 10 years younger than you.
For example, if you turn 74 this year and had a $300,000 IRA balance on December 31 of last year, you would find your age on the Uniform Lifetime Table. The corresponding distribution period is 25.5. Your RMD would be $300,000 divided by 25.5, which equals approximately $11,765 for the year.
You are responsible for ensuring the correct RMD is withdrawn by the December 31 deadline. The funds can be taken in a single payment or multiple distributions. Any amount withdrawn beyond the RMD cannot be applied to future RMD requirements.
Consequences of a Missed Distribution
Failing to take your full RMD by the annual deadline results in a tax penalty. The IRS imposes an excise tax on the amount that was not withdrawn as required. The SECURE 2.0 Act reduced this penalty.
The penalty for a missed RMD is 25% of the amount you failed to withdraw. For example, if you were required to take out $10,000 but only withdrew $2,000, the penalty would be 25% of the $8,000 shortfall, or $2,000.
If you correct the mistake in a timely manner, the penalty can be reduced to 10%. This generally requires withdrawing the shortfall within a two-year window. You must file IRS Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts,” to report and pay the tax. The IRS may waive the penalty if you can show the error was reasonable and you have taken the missed distribution.
Special RMD Rules and Exceptions
Several specific situations can alter how and when you must take distributions. These rules address scenarios like continuing to work, owning multiple retirement accounts, and inheriting an account.
The Still-Working Exception
If you are still employed past the RMD age and participate in your current employer’s 401(k) or 403(b) plan, you may be able to delay RMDs from that specific plan until you retire. This exception is available only if the plan allows it and you do not own more than 5% of the business. This rule does not apply to other accounts, so you must still take RMDs from Traditional IRAs and 401(k)s from previous employers.
Aggregation Rules
If you have multiple Traditional IRAs, you must calculate the RMD for each one separately. However, you can add the RMD amounts together and withdraw the total from any one or combination of your IRAs. This aggregation rule also applies to 403(b) accounts. In contrast, RMDs for 401(k) and 457(b) plans must be calculated and withdrawn from each specific plan.
Inherited Accounts
The rules for beneficiaries who inherit retirement accounts are different from those for original owners. Following the SECURE Act, most non-spouse beneficiaries are subject to a 10-year rule. This requires the entire account balance to be distributed by the end of the tenth year following the original owner’s death. The rules can be more nuanced depending on whether the original owner had already started taking RMDs, so beneficiaries should review the specific regulations.