There’s a lot that goes into planning for your required minimum distributions in retirement, including when you must take them, how much you must take, and more.
Whether you’re a decade away or marking days off a calendar, retirement takes a lot of effort and thoughtfulness. One often-confusing piece of your retirement budgeting? Required minimum distributions, or RMDs. Let’s break down what RMDs are and how you can use them to create a successful plan for retirement.
An RMD is money that you, once you reach a certain age (see below), are required to withdraw from employer-sponsored retirement plans such as 401(k)s and traditional IRAs.
Thanks to recent legislation, there are two age brackets that affect when you must begin taking RMDs.
- Age 73 if you turn 72 on or after January 1, 2023 or 73 before January 1, 2023
- Age 75 if you turn 73 on or after January 1, 2033
RMDs are calculated according to an IRS formula:
- Retirement account’s prior year-end fair market value / applicable IRS life expectancy factor = RMD for that year
There are several life expectancy factors for that calculation; which one you use depends on your situation. Sole spousal beneficiaries who are more than 10 years younger than an account holder may use a specific table, for example. In addition, as you age, your RMD may increase.
Why age 73 and why a formula? Remember: You have not yet paid income taxes on the pretax money that’s in accounts like a 401(k) and an IRA. So, an RMD is a way for the IRS to collect that tax, and for you to spread out the withdrawals over your remaining lifetime.
No. Remember, it’s calculated at the year-end fair market value and your life expectancy, so both of those will continue to change throughout your retirement.
Typically, you can request an RMD from your plan sponsor, or by working with your financial professional.
Every RMD must be taken by December 31 of each year, starting at the required age (see above).
Seems straightforward, right? Unfortunately, it’s not so simple for your first RMD. That one can be taken the year you reach the required age, or you can choose to take it by April 1 following the year you reach the required age. Here’s an example:
Mary turns 73 on May 1, 2025. She can either:
- Take her first RMD by December 31, 2025 or ...
- Defer her first RMD until April 1, 2026. But she will have to take a second RMD by December 31, 2026, then one every year after by December 31.
Why would someone defer that first RMD? They may not need the funds yet, or the deferral may be part of an overall tax strategy. In addition, some plans may allow a deferred start date if you’re working past the required RMD age. (See below.)
One note: You must account for twice the taxes if you choose the first-year strategy of one payment in April and one in December.
If you choose not to take your RMD or miss the deadline, you’ll face an income tax penalty—25%—on the amount not withdrawn. However, if you apply for a waiver due to a “reasonable error” and fix the mistake within two years, you may have the penalty reduced to 10%.
It depends. Because 401(k), 403(b), and IRA accounts are created with pre-tax dollars, you haven’t yet paid any tax on them. RMD requirements help the IRS ensure those tax dollars are collected.
While RMDs are typically subject to a standard 10% withholding, you may elect out of this. And, whether or not you are required to pay taxes depends on your individual tax bracket.
You’ll pay normal federal and state (if applicable) income taxes on your RMDs, based on your tax bracket. But there are no spending requirements for RMDs: You can withdraw the total and choose not to spend any of it. You can also convert those RMDs into a Roth IRA.
Yes; you can always take more, but never less. And, if you take more one year you don’t have to take more any year after that.
Just note: You may have to pay taxes on whatever total you withdraw, depending on your individual tax bracket. Also, your plan is required to withhold 20% on any portion that is greater than the RMD, unless you are completing a direct rollover. Finally, just because you take an additional distribution one year doesn’t mean you can take less than the calculated RMD the following year.
No; RMDs do not apply to Roth IRAs or on the Roth portion of the retirement plan, if the participant is still alive. These retirement accounts were created with post-tax dollars, so there’s no tax bill (and no required minimum distribution) on the use of these funds.
The answer is different depending on the type of the account.
- 401(k)s: Every separate employer-sponsored retirement account has its own RMD that must be withdrawn. One way to avoid this is to roll over as many 401(k)s as you can into one through consolidation. Then, you can streamline both account management and RMDs. Note: 403(b) plans may be combined; RMDs are calculated for all of these plans, but you can elect to take that full total from just one 403(b).
- IRAs: You must calculate the RMD for each IRA separately, but you can then take the total IRA RMD from just one account, or a combination of accounts.
No; you may take RMDs as a lump sum or as a series of withdrawals. If your plan allows, you may also choose to receive an RMD as an automatic transfer.
There are no requirements on how you use RMD funds. If you don’t need them, the only restriction is that you cannot roll them over into another tax-deferred account. To figure out what works for your retirement goals and the implications for your tax bill, consult a financial professional and tax advisor.
The answer is both yes and no: Yes, you must take RMDs from any IRAs and 401(k)s from previous employers. But no, if your current employer’s plan allows it, you do not have to take an RMD from your current account.
It depends on who you are (spouse, child, etc.), among other factors. The best thing to do is consult the plan sponsor and your financial professional.
What’s next?
Have a few years left before retirement? Catch-up contributions can help boost your overall savings. Log in to your Principal account to assess your savings rate and see if extra funds would help.
