When it comes to retirement planning, Required Minimum Distributions (RMDs) play an essential role in managing your tax liability and staying compliant with IRS rules. These mandatory withdrawals apply to certain retirement accounts once you reach a specific age or inherit funds, and failing to follow the rules could result in steep penalties. In this post, we’ll break down what RMDs are, who needs to take them, how they’re calculated, and the potential consequences of missing a withdrawal deadline.
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RMDs are mandatory withdrawals from retirement accounts. The IRS requires retirees and some beneficiaries of inherited accounts to withdraw a minimum amount each year.
Failure to comply can be costly. Missing an RMD deadline or withdrawing less than required could result in significant penalties.
Planning ahead helps minimize taxes. Working with a tax professional or financial advisor can help you stay compliant while reducing unnecessary tax burdens.
What Are Required Minimum Distributions?
Required Minimum Distributions, or RMDs, are the minimum amounts that must be withdrawn each year from certain retirement accounts, including traditional IRAs, 401(k)s, 403(b)s, and other tax-deferred accounts. Because these accounts allow your savings to grow tax-deferred, the IRS eventually requires withdrawals so it can collect taxes on that money.
In short, RMDs ensure retirement savers can’t defer taxes indefinitely and that retirement funds are used as intended – for retirement.
Who Has to Take RMDs?
Generally, RMDs must be taken starting at age 73 (for tax years 2023 and later). However, RMDs also apply in other cases:
- Traditional retirement account holders – Anyone with a traditional IRA, 401(k), 403(b), or other qualified plan must begin RMDs at the required age.
- Inherited retirement accounts – Beneficiaries of inherited IRAs or other retirement accounts may have to take RMDs regardless of age, depending on their relationship to the original account owner and when the inheritance occurred.
- Roth IRAs (special case): Owners of Roth IRAs are not subject to RMDs during their lifetime, but beneficiaries who inherit a Roth IRA may need to take withdrawals.
How to Calculate Your Required Minimum Distribution
The IRS provides a formula to determine your annual RMD:
RMD = Account Balance (as of December 31 of the prior year) ÷ IRS Life Expectancy Factor (your age at the end of the tax year)
You can find the IRS life expectancy factor in the IRS Uniform Lifetime Table (see below) or, for inherited accounts, in the Single Life Expectancy Table.
Uniform Lieftime Table
| Edad | Life Expectancy Factor | Edad | Life Expectancy Factor |
| 72 | 27.4 | 97 | 7.8 |
| 73 | 26.5 | 98 | 7.3 |
| 74 | 25.2 | 99 | 6.8 |
| 75 | 24.6 | 100 | 6.4 |
| 76 | 23.7 | 101 | 6 |
| 77 | 22.9 | 102 | 5.6 |
| 78 | 22 | 103 | 5.2 |
| 79 | 21.1 | 104 | 4.9 |
| 80 | 20.2 | 105 | 4.6 |
| 81 | 19.4 | 106 | 4.3 |
| 82 | 18.5 | 107 | 4.1 |
| 83 | 17.7 | 108 | 3.9 |
| 84 | 16.8 | 109 | 3.7 |
| 85 | 16 | 110 | 3.5 |
| 86 | 15.2 | 111 | 3.4 |
| 87 | 14.4 | 112 | 3.3 |
| 88 | 13.7 | 113 | 3.1 |
| 89 | 12.9 | 114 | 3 |
| 90 | 12.2 | 115 | 2.9 |
| 91 | 11.5 | 116 | 2.8 |
| 92 | 10.8 | 117 | 2.7 |
| 93 | 10.1 | 118 | 2.5 |
| 94 | 9.5 | 119 | 2.3 |
| 95 | 8.9 | 120 and older | 2 |
| 96 | 8.4 |
For example, someone who is 85 at the end of the current tax year and had a traditional IRA balance of $500,000 at the end of the previous year would need to take an RMD of $31,250 ($500,000 ÷ 16 = $31,250).
If it seems confusing, don’t worry. Many financial institutions offer online calculators or can provide your RMD calculation upon request.
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If you are taking RMDs from an inherited IRA, you must use your age in the calendar year following the year of the account owner’s death to calculate the RMD, not the original account holder’s age. This detail is often overlooked but is crucial for compliance.
When Are RMDs Due?
RMDs must generally be taken by December 31 each year. However, there’s one exception: in the year you reach your required beginning age (currently 73), you can delay your first RMD until April 1 of the following year. Keep in mind that delaying your first withdrawal means you’ll have to take two RMDs in one year, potentially resulting in a larger tax bill.
If you inherit an IRA and are a non-spousal beneficiary, you’ll typically need to take RMDs (for yourself) in the year following the original account owner’s death. Additionally, if the original owner failed to take their RMD before their death, the total amount due should be withdrawn by the beneficiary by December 31 of the year following their death. Previously, the RMD was required by December 31 of the year of the account owner’s death, but the IRS revised this rule and now waives penalty fees as long as it is withdrawn by the following tax year.
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Failing to take an RMD, or withdrawing less than required, can trigger steep penalties. Currently, the IRS penalty for missed RMDs is 25% of the amount not withdrawn (which can be reduced to 10% if corrected promptly).
Why Work With a Tax Professional?
RMDs can be complicated, especially if you manage multiple retirement accounts or have inherited funds. A tax professional or financial planner can help you:
- Ensure you take the correct RMDs on time.
- Develop strategies to minimize the tax impact of withdrawals.
- Plan long-term retirement distributions to preserve more of your wealth.
By planning ahead, you can stay compliant with IRS rules and make smarter decisions about how and when to take your distributions.