Your retirement income: How required minimum distribution (RMD) rules work

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Taking a little bit from the retirement stack.

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A required minimum distribution (RMD) is the amount the government requires you to withdraw each year from certain retirement accounts—such as your 401(k) or individual retirement account (IRA)—once you reach a certain age.

The basic idea of an RMD may sound straightforward, but there are a number of factors that play into this particular part of your retirement income stream.

RMDs typically apply to tax-deferred accounts, including employer-sponsored 401(k) plans and traditional, SEP, or SIMPLE IRAs, when the account holder reaches age 73.

At this point, you’ve been able to set money aside in these accounts, ideally for many years, without paying taxes on your contributions or on any gains. By requiring a minimum withdrawal each year, Uncle Sam is simply ensuring that you don’t defer those tax payments forever. RMDs are normally taxed as ordinary income (unless you have a Roth account).

Calculating the correct amount of these distributions can be complicated. It depends on several factors, including:

The good news: your account custodian (that is, a bank, broker, or plan sponsor) will typically calculate your RMD for you. If you have more than one account that’s subject to RMDs, you’ll have to take each one separately.

RMDs for inherited IRAs are tricky business, and not something most people want to figure out on their own. If you inherit a relatively small IRA, you might want to skip the RMDs. You could take the money all at once, pay the taxes, and then save, invest, or spend it as you see fit. If it’s a large IRA, you should seek guidance from a tax or retirement specialist.

Under the SECURE 2.0 Act, passed in 2022, the age at which you have to take RMDs increased to 73 from 72. There’s also a provision to raise it to 75 for those born in 1960 or later. Once you turn 73, you still don’t have to start your RMDs immediately; you have until April 1 of the year after you turn 73 to make sure you withdraw the required amount.

You can generally withdraw money from a 401(k) or IRA without an early-withdrawal penalty starting at age 59½. But once you reach your RMD starting age, there’s a minimum amount you must withdraw each year. There is no maximum withdrawal.

You don’t have to take your RMD all at once. But your combined withdrawals for a given year need to add up to the correct amount, or you could face a stiff penalty. How stiff? According to the IRS, 25% of the amount you didn’t withdraw. For example, if your RMD was $10,000, and you only withdrew $6,000, the remaining $4,000 would owe a tax penalty of 25%, or $1,000. If you correct an RMD shortfall—by taking the missed amount and reporting it within two years—the IRS will reduce your penalty from 25% to 10%.

What if you don’t retire by the time you’re 73? If your employer’s 401(k) plan allows it, you might be able to delay your 401(k) RMD until your retirement date. Be sure to check with your plan sponsor or administrator.

Are you interested in planning your retirement? Use the calculator in this article to figure out how much to save for your retirement—and how long those savings might last. Are you on track?

If you need to calculate the amount of a required distribution from a given account, use the IRS worksheet found in Publication 590-B. The amount of your RMD is based on the fair market value (FMV) of the account on December 31 of the prior year, divided by the IRS distribution period (which is based on your life expectancy). Other factors include your spouse’s age (if you are married) and whether or not your spouse is your beneficiary.

Remember, you have to calculate the RMD for each qualifying retirement account. And you must calculate your RMD each year, for each account, because the amount changes as you get older and your IRS distribution period changes.

With a few exceptions (such as a qualified charitable distribution), most required distributions from tax-deferred accounts are taxed as ordinary income. After all, you generally owe taxes anytime you withdraw money from a tax-deferred account like a traditional IRA or 401(k).

What makes RMD taxes a bit different is that you cannot dial back your withdrawals to reduce your tax bill; you owe taxes on the specific RMD amount for each year.

Unlike traditional, SEP, and SIMPLE IRAs, you’ve already paid taxes on the money saved in a Roth account, so withdrawals from a Roth are tax free. Further, as of January 1, 2024, required minimum distributions for Roth 401(k) accounts are no longer required as a result of the Secure 2.0 Act.

If you’ve been saving in tax-deferred retirement accounts for many years, the sooner you become familiar with required minimum distribution rules, the better. Although you don’t have to take your first RMD until you’re 73, setting up a long-term retirement income plan is a nuanced process, and it can take some time to get all the pieces in place.

Knowing that you have to factor in certain minimum withdrawal amounts each year can help you adjust your financial plan to address any tax implications. And because the RMD rules for beneficiaries are different, knowing the rules can help you create a stronger estate plan as well.