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How Required Minimum Distributions Work

Dana Anspach

June 24, 2022

Tax-deferred growth is the winning feature of retirement accounts — traditional IRAs, SEP-IRAs, SIMPLE IRAS, SARSEP IRAs, Roth IRAs, 401(k)s and the like. But, except for 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 reach 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 If you miss the December 31 deadline, a whopping 50 percent tax penalty may apply to the amounts not withdrawn in time.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 rules which apply to the beginning date for your first RMD 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 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 plans are similar. That 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. Suppose you wait until April 1 of the year after you attain 72. 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 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, 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 2022, use the age you become on your birthday in 2022.

Example. Rick is retired and turned 72 in July 2022. His combined IRA balances on December 31, 2021, were $850,000. For Rick, the divisor, or “distribution period,” based on life expectancy, is 27.4. Rick takes the year-end balance of $850,000 and divides it by 27.4 to calculate how much he must take out. Rick will have to withdraw $31,021.90 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.

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 Go to Calculate my RMD?

There are many online RMD calculators; however, as of June 2022, some of them still do not include updated language to reflect the new rules for the SECURE Act passed in December 2019. Before the SECURE ACT, RMDs began at age 70½. 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 age 72, 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), TSA, SEP, or SIMPLE. You must also follow the aggregation rules covered below under “What if I have multiple accounts?”

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.

What about Roth IRAs?

While RMDs are not required for Roth IRAs, you must take RMDs from Roth 401(k)s, 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 more in Designated Roth Accounts.

What about inherited Roth IRAs?

If you started a Roth IRA, you are not required to take RMDs. However, you must take distributions if you inherit a Roth IRA. If you inherit from a spouse, you can 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 new rule came along in December 2019 with the passing of the SECURE ACT. Before the SECURE ACT, beneficiaries 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?

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 total 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. 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.

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 age 72 and do not own 5% or more 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 401(k)s 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 age 72 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 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 can defer all distributions 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.

It pays to engage in long-range planning if you plan on retiring in your late 60s or earlier. Between the ages of 55 and 72, 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 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’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. 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.