What Are Required Minimum Distributions?

What Are Required Minimum Distributions?

If you've been deferring taxes for decades in a retirement account, you can bet that Uncle Sam will want to get his hands on his share eventually. Required minimum distributions mandate that you start withdrawing money from the plan in order to begin paying taxes on it. This doesn't have to happen right at retirement age but will begin within a few years, depending on when you were born:

• If you turned 72 on or after Jan. 1, 2023, and 73 before Jan. 1, 2033, you must begin RMDs at age 73.
• If you turned 74 on or after Jan. 1, 2033, you must begin RMDs at age 75.

According to RMD rules, starting with the April 1 in the year after you reach the required age, you must begin taking annual distributions from your qualified retirement plans. For all subsequent years, including the remainder of the year in which the first RMD distribution occurred by April 1, you must take an RMD by December 31 of the year.

This applies to any retirement accounts into which you made tax-deferred contributions, including 401(k) plans, Roth 401(k) plans, 403(b) plans, 457(b) plans, traditional IRAs, and other IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

• Acronym: RMD

How the RMD Calculation Works

The amount you must withdraw is based on the value of your accounts at the beginning of the year for which you are required to take a distribution. That total is then divided by your life expectancy as determined by the IRS. One of three separate tables is used, depending on your situation:

• The sole beneficiary is the owner’s spouse who is more than 10 years younger than the owner.
• You have other beneficiaries besides your spouse, or your spouse is not more than 10 years younger than you.
• You're the sole beneficiary of the account.

The IRS's website has worksheets that can help you figure out your minimum distribution for the year. There are also online calculators that will do the same job. Many retirement plan custodians or financial planners can help you calculate your RMD, but keep in mind they are not required to do so.

Rules for Distribution After Death

The rules change a bit if the owner of an account requiring RMDs dies.

For plan holders who died before January 1, 2020, the plan balance must be distributed to its beneficiary in full within five years or over their remaining lifetime, beginning within one year of the plan holder's death. For plan holders that die after December 31, 2019, the entire balance of the plan must be distributed within 10 years. There are exceptions for some beneficiaries, include a surviving spouse, minor children, a person no more than 10 years younger than the plan holder, or a person who has a disability or chronic illness.

Spending RMDs

For those fortunate retirees who have other sources of retirement income or who might otherwise not spend the assets in their qualified retirement accounts, the RMD requirements kick in and create taxable income they may not have been planning on receiving. And just like any other retirement income, you can put your RMD toward living expenses, a taxable investment account, or a monetary gift to charity. The only thing you cannot do is reinvest the money in another qualified retirement account.

Roth Accounts and RMDs

It is important to note that Roth IRAs are not subject to RMD rules during the account owner's lifetime unless they are inherited accounts, in which case different rules for distributions apply. However, Roth 401(k)s are still subject to required minimum distribution rules. You can avoid taking RMDs from a Roth 401(k) by rolling the account over to a Roth IRA, but you will have to pay taxes on any employer contributions that were made pre-tax.

You can learn more about all the account types subject to RMD rules and other information about RMDs by visiting the Internal Revenue Service's FAQ page on RMDs.