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IRAs Retired Investor

Required Minimum Distributions Explained

The tax code requires distributions be taken from most retirement accounts on an annual basis, known as required minimum distributions (RMDs). 

by Charles Rotblut | August 2023

Charles Rotblut leads a class in AAII's new Essential Investing Video Course. Go to https://www.aaii.com/ves for more information and to subscribe.

The tax code requires distributions be taken from most retirement accounts on an annual basis. Known as required minimum distributions (RMDs), they are mandatory starting at a certain age for those who own one or more of the covered types of retired savings accounts. In 2022, the starting age was 72 (70½ or older if born before July 1, 1949). With the passage of the SECURE 2.0 Act in December 2022, the age at which RMDs must begin rose to 73 for years 2023 through 2032, and will rise to age 75 in 2033.

Brokerage firms and mutual fund companies will tell you how much must be withdrawn from each covered retirement account. Because taxes can be owed on these distributions and there is some flexibility in terms of which account you take the RMD amount from, it is helpful to understand the rules regarding RMDs and how they are calculated.

When Must You Take an RMD?

RMDs must be taken each year no later than December 31. Those who turn 73 in a given calendar year can postpone taking their first RMD until April 1 of the following calendar year. If the first withdrawal is postponed until the following calendar year, the second RMD must be taken no later than December 31 of the same calendar year.

Starting in 2023, failure to take the full RMD by the deadline will result in a 25% tax being levied on the amount not withdrawn (down from a 50% tax in effect through 2022). For example, if you are required to withdraw $10,000 by year’s end and you only withdraw $5,000, you will incur a $1,250 tax penalty (25% of the remaining $5,000). The penalty is reduced to 10% if the RMD is taken by the end of the second year following the year it was due.

Which Accounts Are Subject to the RMD Rules?

Both employer-sponsored retirement plans and most individual retirement accounts (IRAs) are subject to the RMD rules. RMDs must be taken from 401(k), 403(b), 457(b) and profit-sharing plan retirement accounts. RMDs must also be taken from traditional IRAs, SEP IRAs, SARSEP IRAs and SIMPLE IRAs.

Roth IRAs are not subject to the RMD rules. Through 2023, Roth 401(k) and Roth 403(b) plan accounts are subject to the RMD rules. The SECURE 2.0 Act eliminates RMDs from Roth plan accounts starting in 2024.

Different rules regarding mandatory distributions can apply to inherited retirement accounts. See “Update Your Estate Plan for Your IRAs” in the October 2021 AAII Journal for more information about these types of accounts.

A required minimum distribution must be calculated separately for every retirement account that the RMD rules apply to. If more than one IRA is owned, the cumulative RMD can be taken from one retirement account. The same rule applies to individuals owning more than one 403(b) contract, with the cumulative amount being taken from one 403(b).

RMDs from other types of retirement accounts, such as 401(k) and 457(b) plans, must be taken separately from each account. The RMD amounts cannot be combined.

How Are RMDs Determined?

Two primary factors influence how much you will be required to withdraw from your retirement account each year: your age and the size of each retirement savings account subject to the RMD rules. Specifically, the balance for each account as of the prior December 31 is divided by a number found on one of three life expectancy tables: Joint Life and Last Survivor Table, Uniform Lifetime Table or Single Life Expectancy Table. IRS Publication 590 can help you determine which table to use.

The calculation is simply the account’s balance divided by the distribution period (aka the RMD factor). These distribution periods are designed to increase the proportion of an account’s remaining balance that must be withdrawn each year. The revised tables that went into effect on January 1, 2022—increasing the maximum age from 115 to 120—are not affected by the SECURE 2.0 Act.

The Tax Consequences of RMDs

Distributions from tax-deferred accounts are treated as ordinary income in the calendar year they are taken. These accounts include traditional IRAs, 401(k) plans, 403(b) plans, 457(b) plans, SEP IRAs, SARSEP IRAs and SIMPLE IRAs. The distribution not only impacts the marginal income tax bracket you will fall into but also how much of your Social Security benefits will be taxed and what you will pay in Medicare premiums two calendar years in the future.

Your broker may allow you to transfer shares from your retirement account to your brokerage account in lieu of taking a cash distribution. If so, this distribution is still a taxable event.

Qualified charitable distributions (QCDs) can be used to offset RMDs. These distributions can be made starting at age 70½. Starting at age 73, they offset RMDs dollar for dollar up to $100,000 per calendar year. The maximum distribution will be indexed to inflation beginning in 2024. QCDs have the advantage of reducing the amount of ordinary income, which can make them more attractive from a tax standpoint than donating aftertax dollars. QCDs can be made from an IRA (ongoing SEP or SIMPLE IRAs are excluded). The contributions must be paid directly from the IRA. The total combined amount of any QCD made and RMDs taken must equal the RMD required for that calendar year. The SECURE 2.0 Act allows for a one-time $50,000 QCD to a charitable gift annuity, charitable remainder unitrust or charitable remainder annuity trust.

Since the RMD rules do not apply to Roth IRAs, converting to a Roth IRA can reduce or eliminate future RMDs. The conversions are taxable in the year they occur. Furthermore, if you are age 73 or older, you must first take that calendar year’s full RMD before the Roth IRA conversion is done. 

Discussion

W E from MN posted over 3 years ago:

Is an annual RMD required from an inherited Roth IRA? Does a 10 year rule apply?


DONALD M from AZ posted over 2 years ago:

This article is incomplete. It doesn't mention the 10 year rule and doesn't discuss the differences between a "spousal" and a "non-spousal" beneficiary for an IRA or a Roth IRA. It is possible and legal for the total distribution from an IRA (QCD + taxable distribution) to exceed the RMD although there is a limit on the QCD. The list of accounts subject to RMDs should include 401(a)s. At one time I had one 403(b) and two 401(a)s all from the same employer with TIAA as the provider. Donald Myers, Arizona


ANDREW R from WI posted over 2 years ago:

I turn 73 in 2024 and will be required to satisfy my RMD by April 1, 2025. I plan to use QCDs to avoid adding my RMD to my taxable income. Here’s my question: How early in 2024 can I begin distributing QCDs against my RMD? Thanks, Andy


CHARLES R from IL posted over 2 years ago:

Andrew,

You can effectively start doing the QCDs on the first business day of 2024 for the 2024 tax year. It's preferable to do the QCDs before taking your RMDs for a given calendar year.

Keep in mind that you don't have to wait until you are 73 to start QCDs. They can start once you turn 70-1/2. So if you do some this year, you'll lower your RMD amount for next year.

-Charles


Nedene M from VT posted over 2 years ago:

I found this article very informative, one of the most useful I have read on the AAII site. In particular, it is helpful to know that the RMD total across accounts can be taken from a single account. Sounds like a good strategy for an underperforming retirement account — deplete it first. What I had not understood in my younger years is that effective retirement planning is not just about the saving and investing aspects but also about the withdrawals. Many thanks for this helpful article.


GEORGE F. K from CA posted over 2 years ago:

Charles, You didn't mention Qualified longevity annuity contracts as a way to reduce RMDs. Do you feel that these can be useful? George


CHARLES R from IL posted over 2 years ago:

George,

QLACs, like other annuities, can have a role if they are purchased for the right reasons. QLACs can be suitable for those with a reasonable expectation of living into their 90s or beyond and are concerned about not having enough savings/retirement income to last them through the rest of their life.

While QLACs reduce RMDs upfront, their eventual distributions are taxed as ordinary income though any realized in them (e.g., interest) is not.

-Charles


Chris R from WA posted over 2 years ago:

Thank you for the recent article, “Required Minimum Distributions Explained” and for the series, "Retired Investor". Just because we are retired doesn’t mean we don’t need to stay current with issues related to our investments - quite the opposite. The article was helpful and provided the facts around RMDs. However, calculating an RMD can be a confusing exercise and I would have appreciated some examples of how this is done. I have yet to find a clear explanation of the fact that you start with the prior year’s ending balance and use the current year factor. Or is that correct?.


CHARLES R from IL posted over 2 years ago:

Chris,

The IRS says take the IRA balance "on December 31 of the previous year" and divide it by the distribution period "for your age on your birthday this year."

Here are the IRS' distribution worksheets.

Charles


RICHARD J from VA posted over 2 years ago:

I turn 73 in 2025. Therefore, I will need to take my first RMD by April 1, 2026. However, I am eligible to take QCDs now. Can I take a QCD in 2024 and count it toward my RMD in 2025? If so, how do I let the holder of the traditional IRA and the IRS know that my QCD in 2024 counts toward the RMD in 2025?


CHARLES R from IL posted over 2 years ago:

Richard, The QCDs only reduce the RMD in the calendar year they are taken. Making a QCD this year will reduce your 2025 RMD (which will need to be paid by 4/1/26). This is because it will reduce the 2024 year-end account balance that the 2025 RMD will be based on. Hope this helps, Charles


CAROL B from CO posted over 2 years ago:

"Your broker may allow you to transfer shares from your retirement account to your brokerage account in lieu of taking a cash distribution. If so, this distribution is still a taxable event." What are some situations in which one might wish to do this?


EDWIN C from MI posted 7 months ago:

You should include a comment that RMDs are not required if you are still employed at age 73 and after. RMDs begin in the year you retire. EdC from MI


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