If you have a traditional individual retirement account (IRA), the Internal Revenue Service (IRS) requires you to withdraw a minimum amount from your retirement savings each year once you reach a certain age—currently 73.
These withdrawals, known as required minimum distributions (RMDs), have important tax implications to consider as you plan your retirement strategy. If you don’t withdraw the required amount on time, you can face steep penalties, which is why it is important to be aware of the rules and tax implications for these accounts.
Key Takeaways
- Required minimum distributions are mandatory withdrawals from certain retirement accounts, such as traditional IRAs, that must follow IRS rules or incur tax penalties.
- To calculate your RMD, divide your account balance as of Dec. 31 of the previous year by the IRS distribution period number corresponding to your age.
- If you miss your RMD deadline, you could owe a tax penalty of up to 25% on the undistributed amount.
What Are the Important Rules to Know?
To avoid tax penalties, taking your annual RMD from your traditional IRA before Dec. 31 is important, starting at age 73. If you fail to do so, you’ll be subject to up to a 25% tax on the outstanding RMD amount.
There is one exception: In the first year you’re required to take an RMD, you can delay your withdrawal until April 1 of the following year. However, you’ll need to take two distributions that year—one for the prior year and one for the current year.
Fast Fact
The SECURE Act 2.0 changed the tax penalty of missed deadlines to 25% in December 2022, down from 50% in years prior.
It’s worth noting that the IRS changes the rules for RMDs often, so it’s important to stay up to date with any changes, or consult with a tax advisor to achieve the most tax-efficient outcomes.
How Do You Calculate Your RMD?
Knowing your RMD requirements is an important part of tax planning, and the first step includes calculating the formula for annual withdrawals after you reach a certain age.
While it’s possible for your IRA provider to automatically calculate these distribution amounts for you, it’s valuable to know what to expect since these withdrawals are treated as taxable income each year under IRS rules.
These taxes are based on your income tax bracket, which ranges from 10% to 37% in 2024 and 2025.
The basic formula is:
IRA balance as of Dec. 31 of the previous year ÷ IRS life expectancy factor = RMD
For example, if your IRA balance was $1 million and your life expectancy factor is 26.5 (based on IRS tables for age 73), your RMD for the year would be $37,736.
Tip
The Investor.gov website provides a useful calculator to help calculate your RMD amounts for each year.
Typically, these withdrawal amounts increase over time as you get older, which is important to be aware of since it will impact your overall tax strategy in retirement. In the following table, we show the life expectancy factor determined by the IRS based if a person meets either of the following conditions:
- Unmarried
- Married, but their spouse is 10 years younger than the account owner or less
- Married, but their spouse isn’t the sole beneficiary of the account
| IRS Uniform Lifetime Table | |
|---|---|
| Age | Distribution Period in Years |
| 72 | 27.4 |
| 73 | 26.5 |
| 74 | 25.5 |
| 75 | 24.6 |
| 76 | 23.7 |
| 77 | 22.9 |
| 78 | 22.0 |
| 79 | 21.1 |
| 80 | 20.2 |
| 81 | 19.4 |
| 82 | 18.5 |
| 83 | 17.7 |
| 84 | 16.8 |
| 85 | 16.0 |
| 86 | 15.2 |
| 87 | 14.4 |
| 88 | 13.7 |
| 89 | 12.9 |
| 90 | 12.2 |
| 91 | 11.5 |
| 92 | 10.8 |
| 93 | 10.1 |
| 94 | 9.5 |
| 95 | 8.9 |
| 96 | 8.4 |
| 97 | 7.8 |
| 98 | 7.3 |
| 99 | 6.8 |
| 100 | 6.4 |
The life expectancy factor differs according to your circumstances, so it’s important to check these tables carefully by checking their website or consulting with an advisor. In sum, by planning your withdrawals based on the above steps, you can help create the most tax-efficient outcomes in your retirement strategy each year.
Common Misconceptions With RMDs
Navigating RMDs can be complex, and among the most common misconceptions with RMDs is that these withdrawals are required to stay in your bank account.
“Individuals are sometimes disgruntled because they may not need the whole RMD and want to stay invested in the market,” says David Bigelow, a wealth manager at Coldstream Wealth Management. “They’re excited to learn that although dollars must leave the IRA and be taxed, the proceeds are theirs to do as they please, including being reinvested within a taxable investment account, if desired.”
Another way to minimize tax costs on these withdrawals is by making charitable donations through a Qualified Charitable Distribution (QCD). “Clients will often make a few QCDs early in the year to ‘chip away’ at the remaining RMD required that year,” says Bigelow.
Overall, clients can take different avenues for maximizing their retirement funds while reducing their tax burden in their broader retirement strategy.
The Bottom Line
RMD withdrawals have a meaningful impact on your traditional IRA balance. For this reason, it is important to plan carefully and stay up to date with IRS rules. The good news is that with strategic planning, you can make the most out of these funds by keeping a certain amount invested in the market in a taxable account or donating funds to charity as RMD amounts increase over time.
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