What’s a required minimum distribution, and do I need to take one?

Do the RMD rules apply to me?

Most retirement account holders eventually have to take RMDs. The rules apply to workplace defined contribution retirement plans, including 401(k) and profit-sharing plans, and all IRAs, except for Roth.¹ RMDs also apply to defined benefit plans, but that’s outside the scope of this article.

When do I have to start taking RMDs?

The date you’re required to begin taking distributions generally depends on the type of retirement account you have, your birth date, your employment status, and whether you’re a business owner. In 2019, the RMD starting age increased from 70½ to 72 as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Under the SECURE 2.0 Act, which was signed into law in December 2022, the age was increased again, first to 73, then to 75.

Here are the IRS guidelines for taking RMDs once you attain your RMD age.

Traditional, SEP, and SIMPLE IRAs

• You must take your first RMD by April 1 following the year you attain your RMD age. You have to take your RMD, even if you’re still working.
• After your first RMD, you have until December 31 each year to take your distribution.
• If you wait and take your first RMD after December 31 and before the April 1 deadline, you’ll be required to take your second RMD by December 31 of the same year. This means you’ll take two RMDs in the same year.

401(k), profit-sharing, and other defined contribution plans

• If you’re not a 5% owner of the business, you must generally take your first RMD by April 1 following the later of the year you attain your RMD age or retire. Although your employer may require you to start taking distributions, even if you’re still working. It depends on the terms of your plan document. 
• If you’re a 5% owner, you must take your first RMD by April 1 following the year you attain your RMD age, even if you’re still working. 
• After your first RMD, you have until December 31 each year to take your distribution.
• If you wait and take your first RMD after December 31 and before the April 1 deadline, you’ll be required to take your second RMD by December 31 of the same year. This means you’ll take two RMDs in the same year.

How are RMDs calculated? 

To figure out how much you generally have to withdraw each year:

• Start with your retirement account balance at the end of the preceding year.
• Then choose the appropriate distribution period from the IRS life expectancy table that applies to your situation. The distribution period is based on several factors, including your life expectancy, marital status, and spouse’s age, if you’re married.
• Then divide your retirement account balance by the distribution period.

For example, Craig, age 74, is married and his spouse is age 73. The value of his vested 401(k) account on December 31, 2022, was $100,000, and the distribution period from the IRS’s Uniform Lifetime Table is 25.5. Based on this information, Craig’s 2023 RMD—the amount he must withdraw from his 401(k) account—would be $3,922 ($100,000/25.5).

Please keep in mind that this is a hypothetical example only. The figures are based on assumptions as set out, and your individual circumstances may vary.

You can always withdraw more than the required minimum amount, you just can’t take less. Additionally, you may want to contact your retirement account service provider for assistance. Many offer RMD calculators and worksheets. A financial or tax professional can also help you crunch the numbers.    

What happens if I don’t take my RMD? 

The penalty for taking less than the required amount can be severe. You may incur a 25% excise tax on the amount you should've taken out but didn’t. For example, if your RMD is $1,000 and you only took $500, you may have to pay an excise tax of $125 on the remaining $500. You can potentially reduce the penalty to 10% if you correct the shortfall within the two-year correction window. Additionally, based on facts and circumstances, you might consider requesting a waiver of the excise tax by filing Form 5329 along with a letter of explanation.

How are RMDs taxed?

RMDs are considered taxable income—except for any portion you already paid taxes on, such as after-tax contributions you made to your workplace retirement plan. You’ll pay federal income taxes based on your tax rate and, possibly, state and local taxes.

You may be wondering how much federal income tax you should have withheld from your RMD. There’s no set percentage for these distributions. You can choose to have nothing withheld, 100% withheld, or some percentage in between. The choice is yours and will depend on your financial circumstances; however, if you don’t make a withholding election on IRS Form W-4R, the financial institution will automatically apply the 10% default withholding rate to your RMD payment. Any applicable state tax withholding will also apply. A financial or tax professional can help you determine the right amount of withholding for you. 

What happens if I have multiple retirement accounts? 

The RMD rules apply separately to each retirement account you have. This means if you have both an IRA and a 401(k) plan, you’ll have to take two RMDs every year, one from each account. The same is true if you have money in a previous employer’s 401(k) and your new employer’s plan or have multiple IRAs. Although, with IRAs, you may be able to aggregate your RMDs that are due from each one and take the entire amount from a single IRA or a portion from each. Unlike retirement plans, you don’t have to take a separate RMD from each IRA.

Do what’s required

Be sure to factor in RMDs as part of your retirement income drawdown strategy. Doing so can help ensure you don’t overlook these distributions and avoid significant tax penalties that could erode your hard-earned savings.

1 There are no RMD requirements for a Roth IRA while the owner is alive. 2 Due to a drafting error in SECURE Act 2.0, it is not clear whether age 75 goes into effect in 2033 or 2034. As currently drafted, participants born in 1959 are subject to both age 73 and 75 (attain “age 73 before January 1, 2033,” and attain “age 74 after December 31, 2032”). We expect the language to be clarified in later guidance.