Many people spend their entire working lives building up retirement savings. But while the focus on retirement planning often centers around saving, there's less conversation around withdrawal strategies and how they relate to your taxes.
Most retirement plans have required minimum distributions, or RMDs. But what's an RMD, and how can it affect your retirement withdrawals? Here's what you need to know.
What's an RMD?
An RMD is the minimum amount of money you must withdraw from a tax-deferred retirement plan after you reach a certain age. You can
Previously, you had to start taking your RMD at age 70½, but with the passage of the
- If you turn 73 before 2033, your RMD age will be 73.
- If you turn 74 after 2032, your RMD age will be 75.
- Note that if you turn 72 in 2023, your RMD is due in 2024 with no RMD for 2023.
The IRS made this change because people are living longer and, therefore, are drawing on retirement money for a longer time. The change also permits retirees to take a smaller RMD, allowing for money to stay and grow in their accounts for longer.
Which retirement accounts require RMDs?
Most—but not all—retirement accounts have RMDs, from individual retirement accounts (IRAs) to employer-sponsored plans. Those that do include:
- SEP, SIMPLE and traditional IRAs
- 401(k) plans, including Roth 401(k) plans*
- 403(b) plans
- 457(b) plans
- Profit-sharing plans
- Other defined-contribution plans, such as employee stock purchasing
* No RMDs will be required for Roth accounts (i.e., Roth 401k) beginning in 2024.
RMD rules do not apply to Roth IRAs, which are funded with after-tax dollars. However, there's one exception: Upon the account owner's death, beneficiaries may be required to take an RMD from that account every year or face a penalty.
How do you calculate RMDs?
The amount of your annual RMD withdrawal is based on a formula created by the IRS.
To calculate your RMD, you'll need to divide your retirement account balance(s) as of December 31 of the prior year—adjusted for any outstanding transfers, rollovers and recharacterizations—by your life expectancy factor.
The IRS also offers
The IRS allows account holders to withdraw the total RMD amount from one account or spread it across multiple qualifying retirement accounts. You can aggregate multiple IRAs and multiple 403(b)s but all other retirement account types must be satisfied separately.
Are there any tax considerations with RMDs?
Though IRAs and 401(k)s are pre-tax retirement accounts, it's possible to make nondeductible IRA contributions and after-tax 401(k) contributions. The
You could also
Can you delay RMDs?
Yes, there are a few instances where you may be able to delay RMDs.
- If you're still working at your RMD age, you don't have to take an RMD from your current employer-sponsored retirement plan until you fully retire. The employer's retirement plan document must also allow for this delay.
- If you are the business owner and don't own more than 5% of your company, RMDs are not required unless your ownership increases to 5% or more, or until you retire. The employer's retirement plan document must also allow for this delay.
- If your savings are in a Roth IRA, RMDs are not required. However, if you are a beneficiary of a Roth IRA, have other retirement plan accounts, such as a previous employer plan, SEP, SIMPLE or traditional IRA, RMDs are required.
Penalties are a consideration if you forget to take out your RMD. With the passing of Secure ACT 2.0 the missed RMD penalty dropped to 25% and is dropped to 10% if fixed during the correction window.
Managing your retirement withdrawals
Managing RMDs should be part of your retirement planning. If you're nearing retirement age, make your calculations using the IRS resources or work with a
You've worked hard to save for retirement, and you likely don't want to give up some of your savings to unnecessary penalties. Make sure you understand the RMD rules and deadlines and factor them into your retirement withdrawal strategy.
Taking these steps now could ensure you can truly enjoy every dollar you've saved for retirement.