When you’re ready to retire you might want to hold off on immediately withdrawing money from your account. After all, you should let it grow for as long as you can, shouldn’t you?
Not so fast. Some retirement accounts, like employer-sponsored 401(k)s, require you to start withdrawing money after you reach a certain age. The IRS implements these mandatory withdrawals, known as required minimum distributions. Failure to take the required amount may result in the imposition of steep penalties.
What is a required minimum distribution (RMD) exactly? In this article, we’ll dive into what they are, how to calculate them, and ways you might be able to avoid them altogether.
Erika Taught Me
- The required minimum distribution (RMD) is a requirement set by the Internal Revenue Service (IRS) to withdraw funds from tax-deferred accounts beginning at age 73
- The required minimum distribution amount changes each year and is something you’ll need to calculate to avoid paying penalties
- You can avoid taking a required minimum distribution if you roll assets into a tax-advantaged account like a Roth IRA
What are the required minimum distributions?
Some tax plans — like 401(k)s — are tax-deferred plans. That means you don’t pay taxes now, but you will when you retire and begin pulling money from your account. When this money is out of reach, Uncle Sam doesn’t get to collect taxes on it. To make it taxable, the IRS requires you to start withdrawing money from it once you hit a certain age, whether you want to or not.
This is what is called a required minimum distribution (RMD) — a set amount of money the IRS requires you to withdraw every year starting at age 73. The IRS calculates RMDs based on your life expectancy. The Required Minimum Distribution (RMD) that you are expected to make varies from year to year. As a general rule of thumb, the older you become, the higher the expected withdrawal amounts.
Minimum distribution requirements apply to tax-deferred accounts. That’s because you get to save in these accounts with pre-tax dollars, reducing your taxable income. Because you aren’t paying taxes on the money you put in, the IRS expects you to pay taxes on it when you pull it out later on in life. Required minimum distributions ensure eventual tax collection on the funds, preventing the indefinite holding of cash in your retirement accounts. These are the types of accounts where you can expect to take an RMD:
- 401(k)
- 403(b)
- 457(b)
- Traditional IRA
- Rollover IRA
- Other IRA accounts (ex. SEP and SIMPLE)
- Roth IRA beneficiaries
- Profit sharing plans
- Other defined contribution plans
Your first required minimum distribution will take place by April 1 of the year after you turn 73. Following that, an expectation is in place for you to take a distribution by December 31 each year for the remainder of your life.
How to calculate required minimum distributions
Every year the RMD amount changes based on your life expectancy. As you get older, your life expectancy decreases. Consequently, the expectation is for you to take higher distributions each year.
To calculate your distribution amount, divide the value of your account by the estimated years remaining in your life.
Required minimum distribution table
To determine your remaining life expectancy, follow the IRS’s RMD table below or use one of these IRS RMD worksheets:
| Age | Remaining life expectancy | Required minimum distribution on a $1 million account |
| 73 | 26.5 | $37,735.85 |
| 74 | 25.5 | $39,215.69 |
| 75 | 24.6 | $40,650.41 |
| 76 | 23.7 | $42.194.09 |
| 77 | 22.9 | $43,668.12 |
| 78 | 22.0 | $45,454.55 |
| 79 | 21.1 | $47,393.36 |
| 80 | 20.2 | $49,504.95 |
| 81 | 19.4 | $51,546.39 |
| 82 | 18.5 | $54,054.05 |
| 83 | 17.7 | $56,497.18 |
| 84 | 16.8 | $59,523.81 |
| 85 | 16.0 | $62,500.00 |
| 86 | 15.2 | $65,789.47 |
| 87 | 14.4 | $69,444.44 |
| 88 | 13.7 | $72,992.70 |
| 89 | 12.9 | $77.519.38 |
| 90 | 12.2 | $81,967.21 |
| 91 | 11.5 | $86,956.52 |
| 92 | 10.8 | $92,592.59 |
| 93 | 10.1 | $99,009.90 |
| 94 | 9.5 | $105,263.16 |
| 95 | 8.9 | $112,359.55 |
| 96 | 8.4 | $119,047.62 |
| 97 | 7.8 | $128,205.13 |
| 98 | 7.3 | $136,986.30 |
| 99 | 6.8 | $147,058.82 |
| 100 | 6.4 | $156,250.00 |
Every year, you’ll need to calculate your required minimum distribution for each retirement account you have. If you have both a 401(k) and a traditional IRA, you’ll need to calculate the required minimum distribution for each. This is not just because the IRS guidelines on your life expectancy change, but your retirement account balance will change, too.
The same guidelines apply to joint account holders. If one spouse is named the sole beneficiary on your retirement account and is more than 10 years younger, however, a different RMD table applies.
RMD rules for inherited IRAs
For IRAs that are inherited, there is a 10-year rule that must be followed. The account owner's death necessitates the liquidation of the retirement account by the 10th year. Depending on whether or not the account owner was of age to begin taking RMDs, distributions may be required until the account is liquidated. The distribution requirement for inherited IRAs varies and can depend on how a beneficiary is classified on the account, so it's important to consult a financial advisor about inherited IRAs.
One thing to pay attention to when you’re planning for retirement is the amount of money you’ll be expected to withdraw from your retirement funds as you get older. While a $35,000 required distribution might not seem like a lot of money when you’re 73, a $100,000 minimum distribution when you’re in your 90s might be more money than you realistically need. You should ensure that you withdraw enough from your retirement accounts to cover living expenses, but avoid withdrawing excessively to prevent potential wastage of funds.
What happens if you don’t take the required minimum distribution?
To avoid paying penalties, make sure you take your required minimum distribution each year. This is referred to as a required minimum distribution (RMD). A predetermined sum of money that the IRS mandates you to withdraw annually, starting at the age of 73. After that, you’ll have to take it by December 31 each year.
Before the SECURE 2.0 was passed, you would’ve been assessed a 50% penalty if you didn’t take an RMD or took the wrong amount. Now, failing to take your distribution on time or taking less than the expected amount will result in a 25% penalty. If you fix any mistakes within a reasonable amount of time, the IRS may reduce the penalty to 10%.
How to avoid RMDs
Although tax-deferred retirement accounts typically entail minimum distributions, there are ways to circumvent them.
The easiest way is to keep working. If you continue working at the company that sponsors your 401(k) plan, you won’t have to take a distribution until after you retire. Keep in mind, however, that the same IRS table applies. This means even if you delay taking a distribution, it won’t change the amount of the distribution later on.
You can also avoid taking minimum distributions by rolling your 401(k) or IRA into a Roth IRA. Roth IRAs differ from traditional IRAs and employer-sponsored 401(k)s in that they do not defer taxes. You pay taxes on the money you contribute upfront, eliminating the need for taxes upon withdrawal.
A commonly employed strategy is the Roth IRA Conversion Ladder, which involves transferring assets from a tax-deferred account to a tax-advantaged account. This eliminates the required distribution, allowing you to continue growing your retirement accounts tax-free. This makes it possible to protect your nest egg so you can pass it down with your estate if you decide to.
FAQs
How much is required for minimum distribution at age 72?
The minimum required distribution age changed from 72 to 73 with the passage of the SECURE 2.0 Act beginning in 2023. For someone who is planning to take their first distribution at age 73, divide your year-end account balance by 26.5. For example, if you hold $100,000 in your 401(k), you must take a required minimum distribution of $3,773.58.
Is it better to take RMD monthly or annually?
Whether or not you want to take monthly or annual required minimum distributions will depend on your cash flow needs and overall investment strategy. Taking a monthly distribution can ensure you’re meeting your living expenses and can help you avoid taking too little. If your goal is to grow your retirement account, however, waiting until December 31 can give it more time to appreciate throughout the year.
Learn With Erika
- Free 5 Day Investing Challenge
- Learn how to get started as a beginner investor and make your first $10,000
- Free 5 Day Savings Challenge
- Discover how you can save $1,000 without penny pinching or making major life sacrifices
- Join Erika Kullberg Insiders
- Ask investing questions, share successes and participate in monthly challenges and expert workshops
. . .
