The concept of RMDs is rooted in tax law and aims to ensure the government collects tax revenue on retirement savings that have been allowed to grow without tax for years. But when do you have to start withdrawing, and how do you calculate the required amount? Understanding the basics of RMDs is crucial for retirees to stay compliant and avoid penalties.
What Are Required Minimum Distributions (RMDs)?
Required Minimum Distributions (RMDs) are mandatory withdrawals that retirees must take from their tax-deferred retirement accounts. These accounts include traditional IRAs, SEP IRAs, 401(k)s, 403(b)s, and other similar plans. Roth IRAs are not subject to RMDs while the original account holder is alive, but their beneficiaries will need to take RMDs after the account holder’s death.
According to the Internal Revenue Service (IRS), RMDs are designed to ensure that individuals don’t leave their retirement funds untouched indefinitely, avoiding the deferral of taxes. Since these accounts grow tax-deferred, the government requires withdrawals once an individual reaches a certain age. Failing to take the required withdrawal can lead to substantial penalties, up to 25% of the amount not withdrawn. This penalty can be reduced to 10% if the error is corrected within two years.
The Age Requirement and Calculation Method for RMDs
One of the first things retirees need to know is when they must begin taking RMDs. For anyone who turns 73 in 2025, the first RMD must be taken by April 1 of the following year, meaning 2026. After that, RMDs must be taken by December 31 each year.
Calculating the RMD is not overly complicated, though it can be tricky without the right tools. The amount you must withdraw is determined by dividing the balance of your account on December 31 of the previous year by a life expectancy factor. The IRS provides a series of life expectancy tables to help determine the factor you’ll use. For most retirees, the Uniform Lifetime Table is applicable, which assigns a different factor based on age.
For example, a 73-year-old retiree who has $750,000 in their retirement account would use a factor of 26.5 (according to the IRS Uniform Lifetime Table). By dividing $750,000 by 26.5, the RMD would be approximately $28,303 for that year. If the same person were 75, they would use a factor of 24.6, which would lower the RMD to around $30,490.
Special Rules for Multiple Accounts
It’s also important to note that if you have multiple retirement accounts, the RMD rules can vary. For instance, if you hold more than one IRA, you must calculate the RMD for each IRA individually but can take the total amount from one account. However, for other types of retirement accounts, like 401(k)s and 403(b)s, the RMD for each account must be withdrawn separately.
For example, if a retiree has $500,000 in an IRA and $250,000 in a 401(k), they would calculate separate RMDs for both accounts. For the IRA, with a life expectancy factor of 24.6, the RMD would be around $20,325, and for the 401(k), it would be about $10,163. This ensures that tax-deferred funds are distributed evenly over the retiree’s lifetime.
Though RMDs may seem like an inconvenience, they are a key part of the retirement system, helping ensure that retirees’ savings are used during their retirement years and that taxes are paid on those funds.
