Learn About IRA Required Minimum Distributions

Understanding IRA Required Minimum Distributions: The Basics

A Required Minimum Distribution (RMD) is the amount of money you must withdraw from certain retirement accounts each year once you reach a specific age. The IRS requires these withdrawals because these accounts received tax advantages when you contributed to them. The government wants to eventually collect taxes on that money, so they mandate that you start taking distributions at a certain point in your life.

For most people, RMDs begin at age 73, though this age has changed recently due to the SECURE 2.0 Act. Previously, the age was 72, and before that it was 70½. The rules can be different depending on when you were born and what type of retirement account you have. Traditional IRAs, SEP IRAs, and SIMPLE IRAs all have RMD requirements. Roth IRAs, however, do not require distributions during the account holder's lifetime.

The amount you must withdraw each year is calculated using your account balance and your life expectancy, according to IRS tables. The IRS publishes three different tables depending on your situation. Most people use the Uniform Lifetime Table, which assumes you will live to around age 85 to 90. Your financial institution typically calculates this amount for you, but understanding how it works helps you make informed decisions.

If you don't take your full RMD by December 31st each year, the IRS imposes a penalty. Historically, the penalty was 50% of the amount you failed to withdraw. However, recent changes reduced this to 25% for the first year of non-compliance, and 10% if you correct the error within two years. Even with these reduced penalties, missing an RMD can be costly.

Practical Takeaway: Review your account statements to confirm your birthday and account type, then contact your financial institution to learn your specific RMD amount. Mark December 31st on your calendar as your withdrawal deadline each year.

How RMD Calculations Work and What Affects Your Amount

The calculation for your RMD involves two main pieces of information: your account balance on December 31st of the previous year and a life expectancy factor from an IRS table. To find your RMD, you divide your account balance by the life expectancy factor that matches your age. For example, if you are 75 years old with a $500,000 IRA balance, the IRS table shows a life expectancy factor of 22.9. Dividing $500,000 by 22.9 gives you an RMD of approximately $21,834 for that year.

The account balance used in this calculation is taken on December 31st of the year before you need to make the withdrawal. This means if your account grows significantly in value during the year, your RMD for the following year will be higher. Conversely, if your account declines in value, your RMD will be lower. This is one reason why account performance matters even after you start taking distributions.

Your age on your birthday in the calendar year determines which life expectancy factor you use. The IRS doesn't care when during the year you turn 73 or any other age—they use your age as of December 31st of that year. This means if you turn 73 on December 20th, you're considered 73 for RMD purposes that year.

If you have multiple IRAs, you calculate the RMD for each account separately, but you can withdraw the total from one account or split it among them however you choose. Some people consolidate their IRAs specifically to simplify RMD calculations. If you have a 401(k) or other employer-sponsored plan, those accounts must have separate RMD calculations, and you generally cannot combine them with IRA withdrawals.

Life expectancy factors change each year, and they get smaller as you age. At age 73, the factor is 26.5. By age 80, it drops to 20.2. By age 90, it's 11.4. This means your RMD percentage increases each year, so people typically find they need to withdraw a larger portion of their account as they grow older. Understanding this progression helps you plan your withdrawals and overall financial strategy.

Practical Takeaway: Request an RMD calculation from your financial institution in writing, or download the IRS Publication 590-B which contains the official life expectancy tables and a worksheet you can use to verify the calculation yourself.

Special Circumstances and Exceptions to RMD Rules

The "Still-Working Exception" allows people who are still employed and participating in their employer's 401(k) or similar plan to delay RMDs from that specific plan until they actually retire. This does not apply to IRAs or to plans from previous employers. For example, if you turn 75 and still work for a company where you participate in their 401(k), you can delay RMDs from that 401(k) as long as you remain employed there. However, if you also have an IRA, you must still take RMDs from the IRA.

The "Roth IRA Exception" means that Roth IRAs do not require distributions during the owner's lifetime, regardless of age. This makes Roth IRAs particularly valuable for people who don't need the income and want to leave money to heirs. However, beneficiaries who inherit a Roth IRA after 2023 do face distribution requirements of their own under the SECURE Act rules.

If you turn 73 during 2024 or later, your first RMD is not due until April 1st of the following year. This is called the "first-distribution deadline." For example, if you turn 73 on June 15, 2024, your first RMD can be taken anytime during 2024, but it must be withdrawn by April 1st, 2025. After that first year, all subsequent RMDs must be withdrawn by December 31st. Many financial advisors suggest taking your first RMD during the year you turn 73 rather than waiting until April 1st, because taking two RMDs in one year can push you into a higher tax bracket.

The "Waiver of RMDs" has been granted for certain circumstances. During 2009, the RMD requirement was suspended due to the financial crisis. More recently, some disaster relief provisions have temporarily waived RMDs for people affected by specific natural disasters. These are not permanent changes and only apply during declared periods.

If you inherited an IRA from someone other than your spouse, you may have different RMD rules depending on when the inheritance occurred. The SECURE Act made significant changes to inherited IRA rules starting January 1, 2020. Non-spouse beneficiaries generally must now withdraw the entire inherited IRA within 10 years, though they may need to take annual distributions depending on the type of inherited account.

Practical Takeaway: If you're still working past age 73, ask your employer's benefits department whether you have the Still-Working Exception available and request it in writing. If you inherited an IRA, contact the financial institution holding the account to learn what specific rules apply to your situation.

Tax Implications and How RMDs Affect Your Tax Situation

Money withdrawn from a traditional IRA as an RMD is generally treated as ordinary income and is subject to federal income tax. The amount of your RMD is added to your other income for the year to determine your total taxable income. If you're in a higher tax bracket, a large RMD could push some of your income into a higher tax rate. For someone receiving Social Security, a large RMD can also trigger taxation of your Social Security benefits.

The "Combined Income Test" determines whether your Social Security is taxed. Your combined income is calculated by taking your adjusted gross income, plus non-taxable interest, plus half of your Social Security benefits. If this combined income exceeds $25,000 for a single filer or $32,000 for a married couple filing jointly, up to 50% of your benefits become taxable. If it exceeds $34,000 or $44,000 respectively, up to 85% of your benefits become taxable. A single large RMD could push you over these thresholds.

There is no federal withholding requirement for RMDs, though you can request that your financial institution withhold taxes from your distribution. Many people choose to withhold 10% to 25