If you’ve been planning to withdraw from your retirement accounts only as needed, you may be in for a surprise. The IRS requires you to begin taking required minimum distributions (RMDs) from certain retirement accounts starting at age 72 or 73, depending on your birth year. These mandatory withdrawals are designed to ensure that retirement savings are eventually taxed.
You can also consider working with a financial advisor to ensure your long-term retirement plan accounts for these important rules.
RMDs – When Are They Required?
The following kinds of retirement accounts all come with required minimum distributions:
For IRAs, SEP-IRAs and SIMPLE IRAs, the date for beginning required minimum distributions is April 1 of the year following the calendar year in which you turn 72. For 401(k)s, profit-sharing agreements, 403(b)s and other defined contribution plans, the beginning date for RMDs is usually April 1 after the later of either a) the year you turn 72 or b) the year you retire.
The rules for RMDs were amended for 2023 and beyond. The RMD age was increased from 72 to 73 for anyone who turned 72 during the year 2023.
Do you need help figuring out your required minimum distributions? Try SmartAsset’s RMD calculator to learn more.
How Required Minimum Distributions Are Calculated
To calculate your RMD for the year, take the account balance as of December 31 of the previous year and divide it by the applicable distribution period from the IRS’s Uniform Lifetime Table. The “distribution period” essentially represents your remaining life expectancy in years.
As with most IRS rules, there are a few exceptions that add complexity. For example, if the account holder’s sole beneficiary is a spouse who is more than 10 years younger, the RMD is calculated using a different table, the Joint Life and Last Survivor Expectancy Table.
Other non-spouse beneficiaries use the Single Life Expectancy Table to determine their RMDs.
Why the IRS Requires RMDs
The IRS doesn’t allow you to wait indefinitely before taking distributions because the retirement accounts in question offer tax-deferred benefits. With these accounts, you can make tax-deductible contributions and allow your investments to grow without paying taxes in the meantime.
From the moment you open a traditional IRA, for example, until you reach age 72 or 73, the IRS receives no tax revenue from those funds. Naturally, the government doesn’t intend for this tax deferral to last forever. That’s why required minimum distributions (RMDs) exist.
Without RMDs, individuals could use tax-deferred accounts to grow their wealth indefinitely while avoiding taxes. In exchange for allowing you to deduct contributions and postpone taxes, the IRS ensures it eventually receives its share, especially during your retirement years.
Why Roth IRAs Don’t Have RMDs
Because Roth IRAs and Roth 401(k)s are funded with after-tax dollars, the IRS has already gotten a cut. Roth accounts are great because you don’t pay taxes on the money you take out of them in retirement, and you’re not required to dip into them if you don’t need to. Some retirees choose to diversify their tax burden in retirement by having a mix of Roth and non-Roth accounts.
Do Inherited Accounts Have RMDs?
If you inherit one of the retirement accounts listed above (or even a Roth IRA), you will have to take RMDs. The rules on these distributions depend on whether you’re the spouse of the deceased or another, non-spouse beneficiary.
If you’re the spouse and sole beneficiary of the retirement account, you have several options. You can treat the inherited retirement account as yours and roll it over into a retirement account of your own, base RMDs on your age, base RMDs on your late spouse’s age at death and reduce the distribution period by 1 year annually or withdraw the entire amount by the end of the fifth year after retirement, provided your spouse died before the age at which they should have taken RMDs. If your spouse died before reaching the age for RMDs, you can wait until they would have reached age 72 or 73 to start taking distributions.
The rules for beneficiaries who aren’t spouses are different. If the account owner died before the beginning date for RMDs, you can pocket the entire account balance by the end of the fifth year after the account owner’s death. Alternatively, you can calculate required minimum distributions based on the Single Life Expectancy Table.
Bottom Line
Do required minimum distributions sound too complicated? Are you considering taking your chances, skipping the RMDs and hoping the IRS doesn’t notice? Not a good idea. If you skip taking distributions, or if you take distributions that are too small, you’ll pay for it. To be specific, you will owe the IRS a tax penalty of 25% on whatever amount of your RMD you didn’t take. This can be lowered to 10% if you rectify the mistake within two years. This applies to beneficiaries as well, so add “start taking RMDs” to the list of things you have to do when you inherit.
Retirement Planning Tips
- A financial advisor can help you build a retirement income plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Don’t forget to account for Social Security when you measure your retirement income. Use SmartAsset’s Social Security calculator to begin planning.
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