Understanding RMDs: What Retirees Need to Know

Author: Hillary Stalker, CFP^®

When it comes to retirement planning, saving diligently is only half the story. After years of benefitting from tax-free growth, eventually, the IRS requires you to begin withdrawing money from tax-deferred accounts, whether you need the income or not. These withdrawals are known as Required Minimum Distributions, or RMDs. Understanding the rules around RMDs can help you avoid costly mistakes, all while keeping your plan on track and reducing stress during retirement.

When RMDs Begin

For tax-deferred retirement accounts, including Traditional IRAs, Simplified Employee Pension IRAs (SEP IRAs), Savings Incentive Match Plan for Employees (SIMPLE IRAs), and employer plans like 401(k)s, you must begin taking RMDs by April 1 of the year after you turn 73, if you reach that age in 2023 or later. 

Roth IRAs don’t have lifetime RMDs for the original owner, so the funds can remain untouched for as long as you choose. Roth 401(k)s and once had similar RMD requirements, but beginning in 2024, those rules no longer apply to account owners.

After your first RMD year, all future distributions must be taken by December 31. If you delay your first withdrawal until April 1 of the following year, you’ll end up taking two RMDs in the same calendar year, the delayed first RMD plus that year’s regular one. This can significantly increase your taxable income and potentially push you into a higher tax bracket, so planning the timing carefully is essential.

How RMDs Are Calculated

Your RMD is based on your account balance as of December 31 of the previous year and a life expectancy factor from IRS tables. The Uniform Lifetime Table is used for most people, but if your spouse is more than ten years younger and is your sole beneficiary, you can use the Joint Life Table instead, which reduces the required amount. Understanding which table applies to you can help ensure you withdraw only what’s necessary.

Avoiding Penalties

Missing an RMD or withdrawing less than required can be an expensive mistake. The IRS can impose a penalty of 25% of the amount you failed to withdraw, though this penalty can be reduced to 10% if the error is corrected within two years. Staying organized and setting reminders can help you avoid this costly oversight and keep your plan on track.

Special Situations to Consider

There are also a few special circumstances to be aware of. If you are still working at age 73 or older, and you do not own 5% or more of that company, you may be able to delay RMDs from your current employer’s plan until you retire, provided your plan allows it. This exception does not apply to IRAs.

In addition, if you have multiple accounts, the rules can differ. If you hold several IRAs, you can take the total amount of your required distribution from any one or a combination of those accounts. However, if you have multiple 401(k) accounts, you must take separate RMDs from each plan.

The Bottom Line

Understanding RMD rules can save you from unnecessary stress and penalties. By knowing when RMDs start, how they are calculated, and what exceptions may apply, you can create a plan that aligns with your goals and keeps your retirement on track. Taking time now to understand the process will allow you to spend less energy worrying about deadlines and more time enjoying the retirement you’ve worked so hard to build.