Understanding the Financial Basics of RMDs
At its core, a Required Minimum Distribution is a mandatory annual withdrawal from certain retirement accounts. It’s not optional. Let’s break down the essential rules so you have a solid foundation.
Which Accounts Are Subject to RMDs?
The RMD rules apply to tax-deferred retirement accounts. This is where your contributions were made with pre-tax dollars, and the money grew without being taxed year after year. The most common types of accounts that require RMDs include:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Profit-sharing plans
It’s equally important to know which accounts are not subject to RMDs for the original owner. The most significant of these is the Roth IRA. Because you funded your Roth IRA with after-tax dollars, the government does not require you to take distributions during your lifetime. This is a major advantage of Roth accounts in retirement. However, be aware that inherited Roth IRAs do have their own set of distribution rules for beneficiaries.
When Do You Have to Start Taking RMDs?
The starting age for RMDs has changed in recent years due to new legislation. Your RMD start date depends on your birth year:
- If you were born in 1950 or earlier, you were required to start your RMDs at age 72.
- If you were born between 1951 and 1959, your RMDs must begin at age 73.
- If you were born in 1960 or later, your RMDs will begin at age 75.
Your very first RMD must be taken by April 1 of the year after you reach your RMD age. For all subsequent years, the deadline is December 31. For example, if you turn 73 in 2024, your first RMD is for the 2024 tax year. You have until April 1, 2025, to take it. However, if you delay that first RMD until the following year, you will have to take two RMDs in one year—your first one (for 2024) and your second one (for 2025). Taking two distributions in a single year could push you into a higher tax bracket, so many financial advisors recommend taking your first RMD in the year you turn the required age.
How Is the RMD Amount Calculated?
The IRS calculates your RMD amount using a straightforward formula. It is your retirement account balance as of December 31 of the previous year, divided by a “distribution period” or “life expectancy factor” from the IRS Uniform Lifetime Table.
Let’s walk through a simple example:
Imagine your name is Robert, you are 75 years old, and the total value of your traditional IRAs on December 31, 2023, was $400,000.
- Find your account balance: Robert’s balance is $400,000.
- Find your life expectancy factor: Robert looks up his age (75) on the IRS Uniform Lifetime Table. For 2024, the factor for a 75-year-old is 24.6.
- Calculate the RMD: Robert divides his account balance by the factor: $400,000 / 24.6 = $16,260.16.
So, Robert must withdraw at least $16,260.16 from his IRAs by December 31, 2024, to satisfy his RMD for the year. This withdrawn amount is then added to his other income for the year (like Social Security and pensions) and is taxed as ordinary income.
For official information on Social Security and Medicare, visit SSA.gov and Medicare.gov. Federal tax information is at the IRS.
