What are RMDs and when do you have to take them?

Whether you’re a decade away or marking days off a calendar, planning for retirement takes a lot of effort. One key piece that’s essential to understand? Required minimum distributions, or RMDs. What are RMDs, how are RMDs calculated, and how much must you take every year?

What are RMDs and how are they calculated?

An RMD is simply 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 403(b)s, and traditional IRAs, among others.

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 use a specific table, for example. In addition, as you age, your RMD increases.

Sometimes your financial institution or financial professional may calculate your expected RMD for you; sometimes you must calculate it yourself. Ultimately, though, it’s you who must withdraw the money.

Do you have to take an RMD on Roth IRAs?

No; RMDs do not apply to Roth IRAs. 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.

When do you have to take an RMD?

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:

• Jane turns 73 on May 1, 2023. She can either:
• Take her first RMD on December 31, 2023.
• Defer her first, and only her first, RMD until April 1, 2024. But she will have to take a second RMD on December 31, 2024, 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.

Do you have to pay taxes on RMDs?

Yes; 401(k), 403(b), and IRA accounts are created with pre-tax dollars, so you haven’t yet paid any tax on them. RMD requirements help the IRS ensure those tax dollars are collected.

You’ll pay normal state and federal income taxes on your RMDs, based on your tax bracket. In addition, if you have two RMDs in that first year, as illustrated in the example above, you’ll want to plan for any extra tax due. (Two withdrawals one year also doesn’t change the RMD requirement for the next year.) But there are no spending requirements for RMDs: You can withdraw the total and choose not spend any of it. You can also convert those RMDs into a Roth IRA.

Can you take more than your RMD?

Yes, but you’ll have to pay taxes on whatever total you withdraw. In addition, just because you take an additional distribution one year doesn’t mean you can take less than the calculated RMD the following year.

Can you take just one RMD even if you have multiple retirement accounts?

Unfortunately, for 401(k) accounts, no. Every separate retirement account that you have that has not been rolled over into a single account has its own RMD that you calculate and take, every year. Consolidating multiple accounts into one offers one way to streamline your eventual RMD strategy. 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).