What Are Required Minimum Distributions?

Retirement brings its own unique set of challenges, one of which is managing your investment accounts to ensure you have the funds you need for day-to-day living now and for years to come. Required minimum distributions (or RMDs) are central to retirement.

Here, we discuss what an RMD is and answer frequently asked questions about RMDs.

What Is a Required Minimum Distribution (RMD)?

RMDs are distributions from a qualified retirement account that you are mandated to take beginning at age 73 (up from 72 prior to 2023 and 70 ½ prior to 2020). They exist because these funds have been accumulating in a tax-advantaged account (such as a 401(k) or a traditional IRA), and the IRS needs to begin taxing that income.

Roth IRAs are the exception to RMDs as long as the owner is alive because they are funded with after-tax contributions. Other retirement accounts, including 457 and 403(b) plans, SIMPLE IRAs, SEP IRAs, profit-sharing plans and other defined contribution plans, are all subject to RMDs.

When Do I Have to Start Taking My RMD?

Starting on April 1 the calendar year after you reach age 73, you are required to take distributions each year, which are then counted as taxable income. You can take your first RMD any time before April 1 of the following year; every other year you must withdraw before Dec. 31.

How Do I Calculate My RMD?

Your RMD amount is based on the value of the account on Dec. 31 of the previous year divided by your life expectancy (determined by the IRS). If you have questions about your distributions, the IRS has online worksheets to help you.

Can I Reinvest My RMD?

For those who have other sources of income or are using other retirement accounts for living expenses, you can withdraw your RMD and deposit it into a taxable investment account or gift it directly to charity. If you give it to charity, ensure that you follow the qualified charitable distribution process rather than withdrawing your RMD then giving it to charity; you will not receive a deduction on your tax return, but your RMD amount will not be included in your taxable income. The only thing you cannot do with an RMD is reinvest it in another qualified retirement account.

Most retirees don’t have issues meeting the RMDs, as they are using these accounts to fund their day-to-day living in retirement. The average person will begin drawing before age 73 and will withdraw more than the required minimum each year. However, your money is able to continue growing tax-free if you are able to only take your RMDs and leave more in your account. Any money you withdraw above your RMD cannot be applied to your RMD in another year.

What if I Didn’t Take My RMD?

The penalty for not taking an RMD is an excise tax of 25% of the amount that was not withdrawn in time (down from 50% prior to 2023). For example, if your RMD is $15,000 and you only take $10,000, you would owe $1,250 as a penalty fee. If you make a correction within two years (subject to some limitations), the tax is further reduced to 10%. While there are relief requests, the easiest way to avoid any penalty is to ensure you withdraw your RMD in a timely manner each year.

How Do I Start Taking My RMD?

In order to take your RMD, you, your financial advisor or an authorized representative must contact the administrator of your retirement plan. You should always follow-up to verify that the transaction(s) occurs. Different kinds of accounts work differently; if you have multiple accounts, you may be able to withdraw your total sum from one account.

The SECURE Act 2.0 (passed in December 2022) impacted multiple rules around saving for retirement. 

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