How Required Minimum Distributions Work

Tax-deferred growth is a key feature of retirement accounts — traditional IRAs, SEP-IRAs, SIMPLE IRAS, SARSEP IRAs, Roth IRAs, 401(k)s and the like. But, with the exception of distributions from a Roth IRA, you can’t defer income taxes forever.

In fact, upon reaching age 72, the IRS requires that you start withdrawing as ordinary income a portion of the money in your retirement accounts each year and pay taxes on it. (The start date for your first required minimum distribution or RMD was age 70½ before the passing of the SECURE Act in December 2019.)

When do you need to know about RMDs, what accounts must you withdraw from, how much do you have to take, is there a way to avoid these required minimum distributions, and what are some of the financial implications of RMDs? We’ve got the answers below.

When do required distributions begin?

For most, you must take your first RMD the year you reach age 72. This age was extended from age 70½ to 72 by the SECURE Act in December 2019. If you attained age 70½  before January 1, 2020, you must take distributions in 2021, even though you are not yet age 72. Due to the pandemic, the law waived RMD requirements for 2020.

The IRS gives you until April 1 of the year following the calendar year in which you attain age 72 to withdraw that first distribution, and each year after the year you attain age 72, your distribution must occur by December 31. If you miss the December 31 deadline, a whopping 50 percent tax penalty may apply to the amounts not withdrawn in time.

Note. This IRS chart highlights some of the basic RMD rules as applied to IRAs and defined contribution plans (e.g., 401(k), profit-sharing, and 403(b) plans. And here’s the IRS FAQ on RMDs.)

The IRS does have some complicated rules with respect to the beginning date for your first RMD. For instance, your RMD for IRAs (including SEPs and SIMPLE IRAs) must be taken by April 1 of the year following the calendar year in which you reach age 72, if you were born after June 30, 1949. With one exception, the rules for RMDs for 401(k), profit-sharing, 403(b), or other defined contribution are similar. That one exception is covered below under the “What if I’m still working” section.

For your first-year RMD, it’s usually most tax-efficient to take it the year you reach 72. If you wait until April 1 of the year after you attain 72, you’ll have to take two distributions in that second year, which may cause your taxable income to be quite a bit higher that year, and there could be unintended financial consequences, including higher Medicare Part B premiums and higher capital gains tax rates. You can calculate the taxes doing it either way and then take the option that results in the least total taxes over those two years.

Timing and Tax Withholding

While it can be natural to think of a required distribution as something you do once a year at the end of the year, you don’t have to wait until the end of the year – you can take the withdrawal any time during the calendar year. At most financial institutions, you can set it up as a bi-weekly, monthly, quarterly, or annual automatic deposit to your checking account.

Note. If your retirement accounts remain in a 401(k) plan, some plan custodians limit how often you can take distributions or may charge an extra fee if you exceed an allowed number of distributions in a year.

Most financial institutions also allow you to have federal and state income taxes withheld directly from the distributions. When the financial institution withholds taxes, they are sent directly to the IRS or state on your behalf. Your financial institution will report gross distributions and tax withholdings on a 1099-R tax form at the end of the year. You will need the information on the 1099-R to prepare your tax return.

Although RMDs begin at age 72, you can typically withdraw funds penalty-tax-free from most retirement accounts as early as age 59½ (without having to pay the 10% early withdrawal penalty) and in some cases as early as age 55 or 50.  Those under age 59 1/2, for instance, can avoid the 10% penalty if the withdrawal is for a first-time home purchase, educational expenses, and medical expenses and a few other reasons.

How much do you have to withdraw?

The amount of your RMD will change from year-to-year based on your age and year-end account balances.

To calculate each year’s distribution, you use a formula based on your prior year’s December 31 account balance and a divisor based on your age.

The IRS lists the divisor in a series of published tables. The correct table to use depends on your situation. Most people will use the worksheet called Table III (Uniform Lifetime). If you have a spouse younger than you by ten years or more and who is the sole beneficiary of your IRA, use the worksheet Table II to determine how much to take out.

To find the appropriate divisor, use your age on your birthday in the year of your distribution. For example, if you take a distribution in 2021, use the age that you become on your birthday that occurs in 2021.

Example. Rick is retired and turned 72 in July 2021. His combined IRA balances on December 31, 2020, were $850,000. For Rick, the divisor, or “distribution period,” based on life expectancy, is 25.6. Rick takes the year-end balance of $850,000 and divides it by 25.6 to calculate how much he must take out. Rick will have to withdraw $33,203.13 and pay taxes on that amount. The distribution period decreases every subsequent year because his life expectancy decreases. When Rick is 88 years old, he will divide his retirement account balance by 12.7 to determine how much to withdraw. If he has $800,000 remaining at age 88, that will result in a $66,993.13 distribution that year.

In any year, you can withdraw more than the required amount, just not less.

The RMD tables will be changing beginning in the year 2022, which means at that point, you can expect a slightly smaller required withdrawal.

The sample below shows required withdrawals per $100,000, by age, based on 2021 IRS tables. You can see that as you age, you must withdraw a larger portion of your remaining balance.

If you don’t need the money, there are options, which we cover below, where you can remove the funds from the IRA but leave them invested.

Where Can I Go to Calculate my RMD?

There are many online RMD calculators; however, as of January 2021, many of them have not included updated language to reflect the new rules for the SECURE Act passed in December 2019. Prior to the SECURE ACT, RMDs began at age 70½. This AARP calculator has been updated to reflect the changes in the SECURE Act.

Although the onset age of RMDs has changed, the divisor amounts based on attained age did not change, so the general calculation is the same. This Bankrate RMD calculator allows you to plug in an estimated rate of return and will show you a chart of your projected distributions.

What accounts must you withdraw from?

The IRS requires that at age 72, you begin taking withdrawals from any qualified retirement accounts such as Traditional IRA accounts, 401(k)s, 457 plans, and other tax-deferred retirement savings plans like a TSP, 403(b), TSA, SEP, or SIMPLE.  (Note: If you turned 70½ years old on or after January 1, 2020, the SECURE Act law’s changes apply to you and you do not have to begin taking RMDs until April 1 of the year following the year that you turn age 72. If you turned 70½ years old in 2019, the law’s changes do not apply to you.)

Note special alert 2019 and SECURE Act: The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, waived RMDs during 2020 for IRAs and retirement plans, including beneficiaries with inherited accounts. This waiver included RMDs for individuals who turned age 70½ in 2019 and took their first RMD in 2020. If you began or were supposed to begin RMDs in the year 2020, even though you may not yet be age 72, you must continue to take them in 2021. The age 72 age applies to those who reach age 70½ in 2020 or later.

What about Roth IRAs?

While RMDs are not required for Roth IRAs, they are required for Roth 401(k)s, which are sometimes called a designated Roth account. To avoid the RMD on a Roth 401(k) upon retirement, you can rollover the designated Roth portion of your 401(k) to a Roth IRA. Read Designated Roth Accounts.

What about inherited Roth IRAs?

Although RMDs are not required from a Roth IRA started by you, if you inherit a Roth IRA, you will have to take distributions. If you inherit from a spouse, you have the option to treat the Roth as your retirement account or as an inherited Roth, in which case you’ll have to decide to take distributions based on either your life expectancy or your spouse’s.

For non-spouse Roth IRA beneficiaries, inherited Roth accounts must be fully liquidated within ten years after the year of inheritance to avoid penalties. This is a new rule that came along in December 2019 with the passing of the SECURE ACT. Before the SECURE ACT, inherited Roth IRAs could be distributed over the beneficiaries’ life expectancy.

If you inherit a Traditional IRA from a spouse, you have the option to treat it as your own IRA or as an inherited IRA, and different rules apply depending on which option you choose.

Starting in 2020, if you inherit a Traditional IRA from a non-spouse, you must withdraw all amounts within ten years.

What if you have multiple accounts?

If you have multiple IRA accounts, you can take the appropriate distribution amount from each IRA or add up the year-end balances for all of them, divide by the divisor amount, and take the full amount from just one of the IRAs.

However, if you converted an IRA to a lifetime annuity income stream, the annuity payment will count as the RMD for that IRA only.

If you have 403(b) accounts, you can also aggregate those and withdraw the total required amount from just one of the 403(b) accounts.

If you have money in a 401(k) plan, each 401(k) must take a separate RMD.

Note. While you can combine 403(b) funds, 401(k) accounts, and IRA accounts all into one rollover IRA, if you don’t combine them, you cannot aggregate them to take RMDs.

To simplify your finances, consider consolidating retirement accounts as you near retirement. Most of the time, you can combine investments into three main account-types per person: one traditional IRA, one Roth IRA, and one investment brokerage account. Consolidating reduces complexity, making the whole process easier to manage.

Can I rollover my RMD to a Roth?

You cannot roll a required distribution to a Roth account or convert an RMD to a Roth. You can withdraw your required amount, then convert additional amounts to a Roth IRA.

What if I don’t need the money?

If you would prefer the funds remain invested, you can take an “in-kind” distribution instead of taking a cash distribution. To do an in-kind distribution, you transfer shares of an investment from the IRA to a non-IRA brokerage account.

Example. If you were required to take $13,000 out, you could transfer out 650 shares of a mutual fund that traded at $20 or more per share. You now have no trading costs, and the funds remain invested. At the end of the year, your IRA custodian will send you a 1099-R, which reports the taxable distribution amount. You’ll still pay tax on the amount distributed, but the shares remain invested.

If you don’t need the cash and want to be charitable, you can direct up to $100,000 of your RMD to charity using a Qualified Charitable Distribution (QCD). The amount of your RMD that is a QCD is not included in your adjusted gross income (AGI) on your tax return. Lowering your AGI may reduce other tax obligations you have, such as the NIIT (net investment income tax) or IRMAA, the Income Related Monthly Adjustment Amount.

What if I’m still working?

If you are working after age 72 and do not own 5% or more of the business, you can delay distributions from your 401(k) at the company you are working for until April 1 of the year after you retire. If you have other IRA accounts or other 401(k)s from former employers, RMDs are still required on those.

How do you avoid required minimum distributions?

There are a few ways you can avoid or reduce RMDs.

First, if you reach age 72 and have no money in qualified retirement accounts, then you won’t have to worry about the distribution rules.

Second, if you turn all your qualified retirement accounts into lifetime annuity income payments, then that satisfies your required distributions.

Third, you can convert all or a portion of your qualified retirement accounts to Roth IRAs before reaching age 72. When you convert, you pay taxes on the amount withdrawn from the IRA, then you deposit it to your Roth, where it now grows tax-free with no future required distributions.

Fourth, you could invest a portion of your IRA in a qualifying longevity annuity contract or QLAC. The money invested in a QLAC doesn’t have to be distributed as an RMD until age 85. The amounts you can invest in a QLAC are limited to the lesser of $135,000 or 25% of the owner’s qualified account balances, less previous QLAC contributions. Note: Investing in QLACs could increase your RMD in later years, so engage in long-term tax planning before choosing this tactic.

If you plan on retiring in your late 60s or earlier, it pays to engage in long-range planning. You often have a set of years between ages 55 and 72 when you may be in a lower tax rate. During these years, converting IRA assets to a Roth can reduce your future required minimum distributions and lower your overall expected tax liability over the duration of your retirement years.

In hindsight, was putting pre-tax contributions into retirement accounts smart?

In most cases, it was a good deal for you to defer the taxes all those years. We base the advantage of tax-deferral on the premise that a lower tax rate applies in retirement as typically your total income in retirement is lower than when you were working.

However, if you were a good saver and have a large chunk of money in retirement accounts, once you’re age 72, you may be surprised to find that your tax rate isn’t as low as you anticipated due to your required distributions.  If that’s the case, proper planning will help minimize the taxes associated with having traditional retirement accounts.