How Required Minimum Distributions Work

Dana Anspach

April 4, 2024

Tax-deferred growth is the winning feature of retirement accounts — traditional IRAs, SEP-IRAs, SIMPLE IRAS, SARSEP IRAs, Roth IRAs, 401(k)s, 403(b)s, and the like. But, except for distributions from a Roth IRA, you can’t defer income taxes for life.

In fact, upon reaching age 73—for those born between 1951 and 1959; or 75, for those born on or after 1960 (referred to as the “Applicable Age”)—the IRS requires that you start withdrawing a portion of the money in your retirement accounts each year and pay taxes on it. (The Applicable Age for your first Required Minimum Distribution, or RMD, was age 72 before the passing of the SECURE Act 2.0 in December 2022.)

When do RMDs begin? What accounts must you withdraw from? How much do you have to take? Is there a way to avoid these required distributions? What are some of the financial implications of RMDs? We’ve got the answers below.

When do required distributions begin?

The first RMD is due the year you reach your Applicable Age. This age was extended from age 72 to either 73 or 75 (depending on your date of birth) by the SECURE Act 2.0 in December 2022.

The IRS gives you until April 1 of the year following the calendar year in which you reach your Applicable Age to withdraw that first distribution— referred to as the “Required Beginning Date (RBD)”— and each year thereafter, your distribution must occur by December 31. If you miss the December 31 deadline, a maximum tax penalty of 25%— or 10% under certain attenuating circumstances— may apply to the amounts not withdrawn in time.

The IRS rules that apply to the Required Beginning Date are complicated. 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 your Applicable Age. With one exception, the rules for RMDs for 401(k), profit-sharing, 403(b), or other defined contribution, employer plans are similar. That exception is covered below under the “What if I’m still working” section.

To consider. For your first-year RMD, it’s usually most tax-efficient to take it the year you reach your Applicable Age. Suppose you wait until April 1 of the year after you attain your Applicable Age (i.e., RBD). In that case, you’ll have to take two distributions in that second year, which may cause your taxable income to be higher that year. There could be unintended financial consequences, including higher Medicare Part B premiums and higher capital gains tax rates. You can calculate the taxes either way and then take the option that results in the least total taxes over those two years.

Timing within the year 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 then—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. At the end of the year, your financial institution will report gross distributions and tax withholdings on a 1099-R tax form. You will need the information on the 1099-R to prepare your tax return.  Keep in mind the gross distribution, which includes taxes withheld, is subject to taxes.

Although RMDs begin at your Applicable Age, you can typically withdraw funds penalty-tax-free from most retirement accounts as early as age 59½ (without paying the 10% early withdrawal penalty) and, in some cases, as early as age 55 or 50. For instance, those under age 59 1/2 can avoid the 10% penalty if the withdrawal is for a first-time home purchase, educational expenses, 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 December 31 account balance from the previous year 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) – Appendix B. 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 2024, use the age you become on your birthday in 2024.

Example. Rick is retired and turned 72 in July 2023. His birth year is 1951, so his Applicable Age is 73, and he will take his first required distribution in 2024. His combined IRA balances on December 31, 2023, were $850,000. For Rick, the divisor, or “distribution period,” based on life expectancy, is 26.5. Rick takes the year-end balance of $850,000 and divides it by 26.5 to calculate how much he must take out. Rick will have to withdraw $23,287.68 and pay taxes on that amount. The distribution period decreases every subsequent year because his life expectancy decreases. When Rick is 84 years old, he will divide his retirement account balance by 16.8 to determine how much to withdraw. If he has $800,000 remaining at age 84, that will result in a $47,619.05 distribution that year.

You can withdraw more than the required amount in any year, just not less.

The RMD tables changed starting in 2022. The sample below shows required withdrawals per $100,000, by age, based on 2022 IRS tables. You can see that as you age, you must withdraw a larger portion of your remaining balance.

Table showing the 1st five years of 2022 RMD Uniform Lifetime Table. Plus age 84 & 94 divisors.

Table shows the 1st five years of 2022 RMD Uniform Lifetime Table. Plus age 84 & 94 divisors.

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

Where can I calculate my RMD?

There are many online RMD calculators; however, before the SECURE ACT 2.0, RMDs began at age 72, and some online calculators may not reflect the changes. This AARP RMD calculator is updated to reflect the changes in the SECURE Act. Schwab’s RMD calculator is also current as of this publication date.

What accounts must you withdraw from?

The IRS requires that at your Applicable Age, you begin withdrawing 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), SEP, or SIMPLE. You must also follow the aggregation rules covered below under “What if I have multiple accounts?”

Note. If you were born after January 2nd, 1951, the SECURE Act 2.0 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 either 73 or 75. If you were born on, or before, January 1st, 1951, the SECURE Act 2.0 law’s changes do not apply to you.

What about Roth IRAs?

While RMDs are not required for Roth IRAs, before Secure Act 2.0 you were required to take RMDs from Roth 401(k)s, sometimes called a Designated Roth Account. Secure Act 2.0 eliminated that requirement. Now, RMDs are not required from either your Roth IRAs or Designated Roth accounts.

What about inherited Roth IRAs?

If you started a Roth IRA and made contributions from your earnings or conversions, you are not required to take RMDs.

In general, if you inherit a Roth IRA you don’t have to take yearly RMDs either, but inherited Roth accounts must be fully liquidated within ten years of the owner’s death to avoid penalties However, If you inherit a Roth account from a spouse, you can treat it as your own Roth account or as an “Inherited Roth”, in which case you’ll have the option to stretch required distributions based on either your life expectancy or your spouse’s.

This new rule came along in December 2019 with the passing of the SECURE ACT. Before the SECURE ACT, designated beneficiaries (i.e. living human beings) could withdraw from an inherited Roth IRA over their life expectancy.

If you inherit a Traditional IRA from a spouse, you can 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?

With multiple accounts, the rules vary depending on the type of account.

For multiple IRA accounts titled under the same name, you can calculate, and take, the appropriate RMD amounts from each IRA, or you can aggregate the accounts by adding up their year-end balances to calculate the appropriate aggregate RMD distribution, which you can then withdraw from just one, or more, of the separate IRAs.

For Inherited IRAs, however, you can only aggregate accounts inherited from the same person.

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 401(k) plans, each 401(k) must take a separate RMD.

The same is true of 457(b) plans – each account must take its own RMD, and they cannot be aggregated with other account types.

Note. If you are married, you cannot combine your and your spouse’s IRAs, 401(k)s, or any other types of retirement accounts. Retirement accounts are titled in one individual’s name only.

Here’s a summary of the rules.

  • IRA Accounts: Traditional IRAs, including SEP and SIMPLE IRAs, allow for aggregation. You can total the RMDs from all your Traditional IRAs and take the total amount from any one or a combination of those IRAs.
  • Inherited IRAs: You can only aggregate accounts inherited from the same person.
  • 403(b) Plans: You must calculate the RMD for each 403(b) account you own, but you can total all your 403(b) RMD amounts and take the total from one or more of the 403(b) accounts.
  • 401(k) Plans: You must calculate the RMD for each 401(k) account you own, and you must take the RMD from each 401(k) plan separately.
  • 457 Plans: RMDs from 457(b) plans must be taken separately from each plan. They cannot be aggregated with other retirement account types.

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

To simplify your finances as you near retirement, consider consolidating retirement accounts. You can often 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.

How about IRA annuities?

You can convert all or part of an IRA to an “IRA Annuity” to provide a guaranteed, irrevocable lifetime annuity income stream. Before the enactment of Secure Act in 2019, those annuities could not be aggregated with other IRA for purposes of calculating RMDs. The annuity payments were deemed to satisfy only their own IRA Annuity’s RMDs.  As of 2023, they can be aggregated. Why would you aggregate them?

Annuity payments are calculated differently than RMDs, in a way that typically results in higher dollar amounts than RMDs calculated for the same IRA Annuities.  So, aggregating those IRA Annuities with the others may reduce the overall IRA RMD for many IRA holders. 

For IRAs that own annuities that have guaranteed minimum withdrawal benefit riders, often labeled as GMWB or GLWB (guaranteed lifetime withdrawal benefits), these distributions are treated just as any other IRA distribution and can be aggregated for the purpose of calculating total RMDs. However, the value of the contract that you use for calculating the RMD may be calculated differently. On some statements you will see an “fair market value” or “actuarial present value” and that is the amount you would use as the 12/31 value for purpose of calculating the required distribution.

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 prefer the funds remain invested, you can take an “in-kind” distribution instead of 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). You do not include the QCD portion of your distribution in your adjusted gross income (AGI) on your tax return. Lowering your AGI may reduce other tax obligations, 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 your Applicable Age and do not own more than 5% of the business, you can delay distributions from your 401(k) at the company you work for until April 1 of the year after you retire. However, you must take RMDs on other IRA accounts or from other qualified retirement accounts from former employers.

How do you avoid required minimum distributions?

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

  • First, you won’t have to worry about the distribution rules if you reach your Applicable Age and have no money in qualified retirement accounts.
  • 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 your Applicable Age. When you convert, you pay taxes on the amount withdrawn from the IRA, then you deposit it to your Roth, where it then grows tax-free with no future required distributions during your lifetime.
  • Fourth, you could invest a portion of your combined IRA and qualified defined contribution plans (e.g., 401(k), 403(b), etc.) in a qualifying longevity annuity contract or QLAC. The money invested in a QLAC can defer all distributions until age 85. You can invest in a QLAC as much as $200,000 of your combined balances in those accounts (indexed for inflation) starting in 2023. Note: Investing in QLACs could increase your RMD in later years, so engage in long-term tax planning before choosing this tactic.

It pays to engage in long-range planning if you plan on retiring in your late 60s or earlier. You may be in a lower tax rate between the ages of 55 and your Applicable Age. During these years, converting IRA assets to a Roth can reduce your future required minimum distributions and may lower your overall expected tax liability over 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 your total income is typically 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 reach your Applicable Age, you may be surprised to find that your tax rate isn’t as low as you anticipated due to your required distributions. Proper planning will help minimize the taxes associated with having traditional retirement accounts if that’s the case.  

You can learn more about RMDs in the Everything You Need to Know About RMD video on the Sensible Money YouTube channel.