Required Minimum Distributions (RMDs) Explained

What is a Required Minimum Distribution (RMD)?

A Required Minimum Distribution (RMD) is the minimum amount that a retirement plan account owner must withdraw annually once they reach a certain age, or in the case of an inherited IRA, by a certain date. These distributions are mandatory and designed to ensure that taxes are eventually paid on tax-deferred retirement savings.

Why are RMDs Required?

RMDs are required by the IRS to prevent individuals from indefinitely deferring taxes on their retirement savings. Since contributions to accounts like traditional IRAs and 401(k)s are often tax-deductible, and earnings grow tax-deferred, the government mandates these withdrawals to collect tax revenue. The SECURE Act 2.0 changed the RMD age to 73 for those turning 72 after December 31, 2022, and will increase it to 75 starting in 2033.

How is an RMD Calculated?

The RMD for a given year is calculated by dividing the account balance as of December 31st of the previous year by a distribution period factor from the IRS's Uniform Lifetime Table (or other applicable tables, such as the Joint Life Expectancy Table for spouses more than 10 years younger, or the Single Life Expectancy Table for beneficiaries).

The basic formula is:

RMD = (Account Balance as of Dec 31st of Previous Year) / (Distribution Period from IRS Table)

Step-by-Step Example Calculation

Let's walk through an example for an individual turning 73 in the current year:

Step 1: Determine the Account Balance.

Suppose your IRA balance on December 31st of the previous year was $500,000.

Step 2: Find Your Distribution Period.

For someone turning 73, the Uniform Lifetime Table (as of 2024) shows a distribution period of 26.5.

Step 3: Calculate the RMD.

Using the formula:

RMD = $500,000 / 26.5

RMD = $18,867.92

Therefore, your Required Minimum Distribution for the current year would be $18,867.92.

Frequently Asked Questions (FAQs)

• What happens if I don't take my RMD? If you fail to take your RMD, or withdraw less than the required amount, you could face a penalty of 25% of the amount not withdrawn. This penalty can be reduced to 10% if you correct the shortfall within a certain period.
• Can I take more than my RMD? Yes, you can always withdraw more than your RMD. However, only the RMD amount counts towards satisfying the requirement.
• Does the RMD apply to Roth IRAs? No, RMDs do not apply to the original owner of a Roth IRA. However, beneficiaries of inherited Roth IRAs are subject to RMD rules.
• When is the RMD deadline? Generally, your RMD must be taken by December 31st of each year. For your first RMD, you have until April 1st of the year following the year you reach your RMD age.