What Is the RMD Rate? How to Calculate Your RMD
Understand the IRS rules for mandatory retirement account withdrawals. This guide covers the essential factors and recent changes to help you manage your funds.
A Required Minimum Distribution (RMD) is a mandatory annual withdrawal from certain retirement accounts. Federal law requires these distributions to ensure that individuals use the funds in their tax-deferred retirement plans during their lifetime, rather than solely for wealth transfer. These rules apply to accounts like traditional Individual Retirement Arrangements (IRAs), SEP IRAs, SIMPLE IRAs, and various employer-sponsored plans such as 401(k)s and 403(b)s. The withdrawn amounts are generally treated as taxable income.
Determining Your RMD Starting Age
Recent legislation has altered the age at which you must begin taking RMDs. The SECURE 2.0 Act increased the RMD starting age from 72 to 73, effective January 1, 2023. This change affects individuals who reach age 72 in 2023 or later. For example, if you were born in 1951, your first RMD is for the year you turn 73 (2024) and must be taken by April 1, 2025.
Individuals who turned 72 in 2022 or earlier are not affected by this change and must continue taking their distributions as scheduled. The law further pushes the starting age to 75 for those who turn 74 after December 31, 2032, impacting individuals born in 1960 or later.
Calculating Your 2023 RMD
The RMD calculation uses a specific IRS formula, not a simple percentage rate. To find your RMD, you divide your account balance as of December 31 of the previous year by a life expectancy factor. This factor is found in the IRS’s Uniform Lifetime Table, which is used by most account holders. For instance, if you are 74 years old in 2023, the factor from the table is 25.5.
Consider an individual who is 74 and had a traditional IRA balance of $500,000 at the end of 2022. To calculate their RMD for 2023, they would divide $500,000 by their life expectancy factor of 25.5. This results in a required withdrawal of approximately $19,608 for the year. Failure to take the full RMD amount can result in a penalty of 25% of the shortfall.
Special Considerations for RMD Calculations
An exception to the standard calculation applies if your spouse is the sole beneficiary of your IRA and is more than 10 years younger than you. In this situation, you can use the IRS’s Joint Life and Last Survivor Expectancy Table instead of the Uniform Lifetime Table. This table provides a larger life expectancy factor, resulting in a smaller required withdrawal for the year.
The rules also differ for beneficiaries who have inherited a retirement account. Depending on the beneficiary’s relationship to the original owner and when the owner passed away, different distribution schedules may apply. For example, some non-spouse beneficiaries may use the Single Life Table to calculate annual RMDs, while others might be subject to a rule requiring the entire account to be emptied within 10 years.