Required Minimum Distributions: How To Calculate, Rules

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Once you turn 72, the IRS expects you to take Required Minimum Distributions (RMDs) from your retirement accounts each year.

But how do you calculate your RMDs? And when is the deadline to withdraw the funds?

In this article, I’ll explain how RMDs work, the deadlines you need to meet to avoid stiff tax penalties and what happens if you inherit a retirement account.


Table of Contents


What Are Required Minimum Distributions (RMDs)?

A Required Minimum Distributions (RMD) is the amount of money that you are required to withdraw from a tax-advantaged retirement plan every year after your 72nd birthday.

Why the requirement? Simple: so Uncle Sam can get his tax money. The IRS uses life expectancy tables to determine how much you must withdraw each year. The amount is a percentage of your retirement account balance, and it increases the older you get.

As with most things related to taxes, there are numerous exceptions to and variations of this rule depending on your account type and circumstances. But, for the most part, once you turn 72, you’ll need to start factoring RMDs into your tax strategy. There are also huge penalties if you fail to withdraw the required amount in any given year.


How Do I Calculate My Required Distribution?

In many cases, your retirement account administrator will calculate your RMD for you. However, the IRS makes it clear that you’re “ultimately responsible” for calculating the amount of your RMD.

Figuring out how much money you need to withdraw isn’t as complex as you might imagine. The IRS bases the figures on life expectancy.

The basic calculation:

  1. Find your retirement account balance as of Dec. 31 of the previous year.
  2. Use the appropriate IRS worksheet to figure out your “distribution period.” It’s a basic table. Your age corresponds to a “distribution period” number.
  3. Divide the number from Step 1 by the number from Step 2. This is your RMD: the amount of money you need to take out by the deadline.

RMD Rules: Example Calculation

Here’s a hypothetical example. Susan is 76 years old. She had $300,000 in her 401(k) as of Dec. 31, 2020. Her “distribution period” from Step 2 is 22.0. So, $300,000 divided by 22 is $13,636.36. That’s the amount that Susan must withdraw from her 401(k) by Dec. 31, 2021.

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If Susan is withdrawing from a traditional 401(k) account, that $13,636.36 will be added to any other income that she receives in 2021 and will be part of her income tax bill due in April 2022.

You can find the RMD tables within the IRS Publication 590. Keep in mind that if your spouse is your only primary beneficiary, and he or she is more than 10 years younger than you, you’ll need to use the IRS Joint Life and Last Survivor Expectancy Table, also found within IRS Publication 590.


What Are the Deadlines To Take My RMDs?

You have until April 1 the year after your 72nd birthday to complete your first RMD. So if your 72nd birthday is Jan. 1, 2022, you still have until April 1, 2023 to complete your first withdrawal.

However, starting the year you turn 73, you’ll need to complete your RMD each year by Dec. 31.

Keep in mind that if the money you initially contributed to your retirement account was tax-deferred, as is the case with a traditional 401(k) or IRA, you’ll have to pay income taxes on any money you withdraw.

If you wait until the year after your 72nd birthday to take your first Required Minimum Distribution, you’ll need to take an additional RMD within the same calendar year. That will impact your income tax bill.


What Is the Penalty for Failing To Take RMDs?

If you miss the IRS deadline to complete your annual RMD, or if you withdraw only a partial amount, the IRS will hammer you with a 50% penalty.

Let’s relate that back to Susan and our hypothetical example. She needs to withdraw $13,636.36 in 2021. But what if she takes out only $3,636.36? She’s $10,000 short of her RMD. The IRS will slam her with a $5,000 tax penalty: 50% of the amount she failed to withdraw in time.

If you make an error, you may be able to avoid paying a penalty. The IRS has the authority to waive it, especially if there are strong extenuating circumstances such as an illness or a death in the family.

To fix things, you should withdraw the appropriate amount from your retirement account as soon as possible. Then file “Additional Taxes on Qualified Plans (Including IRAs) And Other Tax Favored Accounts,” which is tax form 5329, along with a letter explaining why you made the mistake and what you’ve done to correct it.

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The IRS will review your information and potentially cancel your 50% penalty.


How To Avoid Taking RMDs

If you’re the original owner of a Roth IRA account, you don’t have to take any distributions within your lifetime. Which makes sense. With a Roth IRA, you’re contributing post-tax dollars. So the IRS already has already taken its cut.

Money expert Clark Howard thinks a Roth IRA is your best investment account option if you don’t have access to a 401(k).

If you’re still working past your 72nd birthday, you may be able to avoid taking RMDs from your 401(k) at your current company. Keep in mind this doesn’t apply to any other retirement accounts you may hold. And there are some conditions that will disqualify you from this exemption (for example, if you own 5% or more of the company for which you work).


What Are the Rules if You Inherit an IRA or 401(k)?

If you inherit an IRA or 401(k), the tax rules can get really complicated really fast. It’s a good idea to consult with a tax professional or a financial advisor to figure out your specific situation.

In many cases, you’ll need to withdraw the full amount within 10 years. But you’ll have some flexibility as to how much to withdraw each year, so you can do this strategically based on your income.

If you’re a surviving spouse, a minor (under 18 in most states), disabled or less than 10 years younger than the deceased, you probably qualify for an exception to the usual 10-year deadline.

There’s also a five-year deadline for the person who inherits the account to withdraw the full amount if the previous IRA owner dies before age 72 and did not designate a beneficiary. That’s just one of many rules that apply to specific scenarios.


Frequently Asked Questions About RMDs

What Happens if You Have More Than One Retirement Account?

The RMD rules apply to all your retirement accounts. So you’ll need to repeat the RMD calculation I explained earlier in this article for each of your accounts.

However, the RMD amounts are not siloed. In other words, if your RMD is $10,000 from one account and $5,000 from another, you can take out all $15,000 from just one of the accounts as long as you meet the overall requirement. You could also take out $7,500 from each account — or any other amount that adds up to $15,000 total.

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Can You Withdraw More Than the Minimum Required?

Yes. You aren’t limited by your RMD for that year. It’s simply the minimum amount you must withdraw to avoid IRS tax penalties.

However, withdrawing more than the minimum amount may increase your income tax bill.

What Types of Retirement Plans Require RMDs?

  • Traditional and Roth 401(k)
  • Traditional IRA
  • SEP IRA
  • SIMPLE IRA
  • 403(b)
  • 457(b)
  • SARSEP
  • Profit-sharing plans

Final Thoughts

Tax-advantaged retirement accounts are great tools to accumulate money for your post-work life. But you’re required to start withdrawing and paying income tax on a portion of those funds once you reach 72 years of age.

You may owe steep tax penalties if you don’t follow the IRS rules for RMDs. Even if you do follow the rules, withdrawing from a retirement account can generate taxable income. So it’s a good idea to discuss your strategy with a tax specialist or financial advisor.


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