Retirement planning doesn’t end when you retire. In fact, some of the most important financial decisions can happen after you leave the workforce, including deciding how and when to take money from your retirement accounts.
One topic that often creates questions for retirees is the Required Minimum Distribution, or RMD. RMD rules determine when you generally must begin withdrawing money from certain retirement accounts and how much you need to take each year.
Understanding these rules ahead of time can help you avoid surprises, manage your tax liability and incorporate required withdrawals into your broader retirement income strategy.
What Is an RMD?
A Required Minimum Distribution is the minimum amount that the IRS generally requires you to withdraw each year from certain tax-deferred retirement accounts once you reach the applicable age.
RMD rules generally apply to accounts such as:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- Other qualifying employer-sponsored retirement plans
The purpose of RMDs is relatively straightforward: retirement accounts such as traditional IRAs and 401(k)s generally allow you to defer income taxes while you save. Eventually, the IRS requires distributions so that those tax-deferred dollars begin entering your taxable income.
Importantly, RMDs are not the same thing as a retirement spending requirement. You may not need the money to cover your living expenses, but you may still be required to withdraw it from certain accounts.
When Do RMDs Begin?
For most individuals, RMDs generally begin at age 73 under current law. However, the SECURE 2.0 Act also provides for the applicable age to increase to 75 for individuals who reach the applicable age after 2032.
For traditional IRAs, your first RMD generally must be taken by April 1 of the year following the year you reach your applicable RMD age. After that, annual RMDs are generally due by December 31.
That first-year timing is important. Waiting until April 1 of the following year can mean taking two RMDs in the same calendar year—your first RMD and the RMD for that year. Because distributions from traditional retirement accounts are generally taxable, this could have an impact on your taxable income.
This is one reason it can be helpful to plan for your first RMD before the deadline arrives rather than simply waiting until the last possible date.
How Is an RMD Calculated?
Your RMD isn’t simply a fixed percentage of your retirement account.
Generally, the calculation uses:
Your retirement account balance as of December 31 of the previous year ÷ an IRS life-expectancy factor
The appropriate life-expectancy factor comes from IRS tables and depends on your circumstances, including whether your spouse is your sole beneficiary and more than 10 years younger than you.
For example, if you have $500,000 in an IRA at the end of the previous year, the amount you are required to withdraw will depend on the applicable IRS distribution factor for your age and situation.
Because your account balance can change from year to year, your RMD can change as well.
Do I Have to Spend My RMD?
No.
An RMD represents a required withdrawal from the account—not necessarily money you have to spend.
If you already have enough income to cover your lifestyle, you may have several options for putting the distribution to work. Depending on your circumstances, you might:
- Use it to cover living expenses
- Reinvest money that you don’t need immediately
- Add to your cash reserves
- Give to family members
- Consider charitable giving strategies
- Use a Qualified Charitable Distribution (QCD) if eligible
A QCD can allow an eligible IRA owner to make a charitable distribution directly from an IRA to a qualified charity, and qualifying distributions can count toward an RMD.
The right approach depends on your income needs, tax situation, charitable goals and overall financial plan.
What About Roth Accounts?
One important distinction is that Roth IRAs generally do not have lifetime RMDs for the original account owner. Designated Roth accounts within employer plans, such as Roth 401(k)s and Roth 403(b)s, also generally are not subject to lifetime RMDs for the original owner under current rules.
That doesn’t necessarily mean Roth accounts are exempt from all distribution rules. Beneficiaries who inherit retirement accounts can be subject to different RMD requirements.
What Happens If You Inherit a Retirement Account?
Inherited retirement accounts can have significantly different rules depending on when the original owner died, the relationship between the owner and beneficiary, and the beneficiary’s circumstances.
Under current rules, many non-spouse beneficiaries are subject to the 10-year rule, which generally requires the inherited account to be emptied by the end of the 10th year following the account owner’s death. Other beneficiaries may qualify for different treatment.
If you’ve inherited an IRA or retirement plan, it’s important not to assume that the rules are the same as those for your own retirement accounts.
RMDs and Taxes
For many retirees, the biggest concern isn’t simply how much they have to withdraw—it’s how the withdrawal affects their taxes.
Distributions from traditional IRAs and many traditional retirement plans are generally included in taxable income, except for amounts that may otherwise be excluded, such as previously taxed basis.
An RMD could therefore affect more than your income tax bill. Depending on your circumstances, additional taxable income may also influence other aspects of your financial picture, including Medicare-related income adjustments.
This is why RMD planning shouldn’t necessarily begin when you turn 73. Looking several years ahead may create more opportunities to coordinate retirement withdrawals, Roth conversions, charitable giving and other tax-planning strategies.
Common RMD Mistakes to Avoid
RMDs may seem straightforward, but there are several details that can easily be overlooked.
Waiting until the last minute.
Waiting until December to address an RMD can create unnecessary stress and leave less time to consider which account and investment to use for the distribution.
Forgetting about multiple accounts.
The rules for satisfying an RMD can differ depending on the type of retirement account. For example, IRA owners can generally aggregate their RMDs across their IRAs, while qualified retirement plans generally have different rules for satisfying distributions from each plan.
Taking the wrong amount.
RMD calculations are based on specific IRS rules and life-expectancy tables. An incorrect calculation can result in an under-distribution.
Ignoring the tax impact.
An RMD is more than a withdrawal. It can affect your overall taxable income and should be considered as part of your broader tax and retirement income strategy.
Assuming an inherited IRA follows the same rules.
Inherited retirement accounts have their own set of rules, and the appropriate strategy depends heavily on the beneficiary’s circumstances.
RMD Planning Should Be Part of Your Retirement Strategy
RMDs are often viewed as an obligation, but they can also be incorporated into a thoughtful retirement income strategy.
Rather than waiting until you’re required to take your first distribution, consider discussing your RMD strategy with your financial advisor several years in advance. Your advisor can help you evaluate how RMDs fit with your income needs, investment strategy, tax planning and estate planning goals.
The goal isn’t simply to take your RMD on time. It’s to understand how those required withdrawals fit into the bigger picture of your financial life.
The rules surrounding RMDs can be complex and may change over time. Your individual situation matters, so consider working with your financial and tax professionals to determine the approach that’s right for you.
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