Understanding The Required Minimum Distribution For Retirement Accounts

How do you calculate the required minimum distribution (RMD) for your retirement accounts? Also: What does the term refer to and why does it even exist?

The short answer to your questions is that a required minimum distribution is the minimum amount that the IRS requires you to withdraw from your retirement accounts each year after you reach a certain age. At the same time, there’s more than meets the eye to RMDs – including how you manage retirement account balances, calculate required minimum distributions, and juggle traditional and Roth IRAs – than one might suspect.

We take a closer look at what you need to know about the required minimum distribution – and how it can impact your financial planning in retirement.

What is the Required Minimum Distribution?

A required minimum distribution (RMD) refers to the minimum amount of money that owners and qualified retirement plan participants must withdraw from a retirement plan each year once they reach a certain age. Most employer-sponsored retirement plans and individual retirement accounts come with this requirement attached, with the total amount that you must withdraw determined by your account balance and life expectancy.

An RMD must also be withdrawn from traditional IRA, SEP, or SIMPLE individual retirement accounts (IRAs) by owners and qualified retirement plan participants. Monies withdrawn as RMDs are taxed as income – and you must pay income tax upon them.

When Does This Start?

RMDs apply to individuals who are aged 70½ and above. However, they do not apply until age 72 if you reached the age of 70½ after December 31, 2019. All individuals with qualifying retirement accounts who fall into these age brackets are subject to RMD provisions.

Which Retirement Plans Require Minimum Distributions?

While RMD requirements do not apply to all retirement account types, many common forms of account fall under their purview. Among the types of retirement accounts that you might expect to see an RMD attached to are:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k) Plans
• 403(b) Plans
• 457(b) Plans
• Profit Sharing Plans
• Other Defined Contribution Plans

On the bright side, if you have a Roth IRA, you won’t have to worry about RMDs, as a Roth IRA is funded with after-tax dollars (upon which taxes have already been paid).

How Do I Calculate My Required Minimum Distribution?

To calculate your RMD, start by confirming that you have the latest worksheet from the Internal Revenue Service (IRS)’s website: For the moment, it’s publication 590, within which can be found the RMD tables needed to calculate your required minimum distribution.

You will then locate your age on the IRS Uniform Lifetime Table and identify the life expectancy factor (sometimes referred to as Distribution Period, as defined by the IRS) that corresponds to it. Afterwards, you’ll need to divide your total retirement balance as of December 31 of the prior year by your life expectancy factor. Once done dividing the previous year’s retirement account balance by your life expectancy factor, you’ll have arrived at your total RMD amount for the year.

For example, say you had $200,000 in a retirement account. If you’re 75, your life expectancy factor is 22.9. Dividing $200,000 by 22.9, we find that your RMD is $8,733.62.

Be advised, however, that if you have multiple forms of retirement plans (for example, both IRA and 401(k) retirement accounts), you’ll need to calculate separate RMDs for each of the plans.

Note that if you possess multiple retirement accounts, you’ll also have the option to remove the distribution from each account. Alternately, you can add up the total amount you owe in RMDs and distribute funds to match from one or more of these retirement accounts, which may prove more advantageous from an investment standpoint.

FAQs Regarding Required Minimum Distributions

Confusing as they can seem at first, there are many frequently asked questions (FAQs) regarding required minimum distributions that taxpayers often have. We’ve included answers to a few of the most common queries below.

Are There Consequences For Failing To Take The Minimum Distribution?

If you fail to take your RMD as required by the deadline designated under law, you have to report it to the IRS. The government will apply a 50% excise tax to any amounts that you were supposed to have withdrawn (minus any sums that you did withdraw as required prior).

In effect, it’s recommended that you comply with regulations here, as any amounts not distributed as required by the government will be heavily taxed. If it helps, you can take RMDs out bit by bit over the course of a year without having to withdraw the entirety of your RMD all at once.

What Happens When The Account Holder Passes Away?

Calculating an RMD in this instance depends on the designated beneficiary of the account, which is typically a spouse, a nonspouse (like your children), or a legal entity such as a charity, trust, or nonprofit organization. You can contact the IRS or a qualified tax professional if you have questions here for further information.

Generally though, you might use the IRS Single Life Expectancy Table to calculate the first RMD. If the account owner dies after reaching age 72, you can use the lower of the beneficiary’s age or age they would have been at their birthday on the year of their death along with its corresponding life expectancy factor to calculate the first RMD instead. Afterwards, you’d typically subtract one year from the life expectancy factor for each year following or calculate it by simply reusing the RMD from the owner’s year of death.

Why Do RMDs Exist?

The IRS has implemented RMD rules to prevent individuals from amassing large retirement accounts, deferring the taxation of these accounts for decades, and then leveraging them as a means to leave relatives a large inheritance.

In effect, RMDs create a scenario where retirement account holders are forced to withdraw at least a portion of the funds in these accounts as distributions that create taxable events while they are still alive and well.

The Bottom Line

Required minimum distributions are federally mandated amounts of money that you are required to withdraw from applicable retirement accounts each year. Income tax must be paid on these monies, which are typically withdrawn from your accounts starting at age 70½ or 72, depending on your birthday.

By rule of the IRS, all qualifying accounts are subject to these RMDs, which apply to all American citizens who fall into these age brackets. Noting this, it’s important to factor any associated expenses into your budgeting calculations.

Are you currently planning for retirement? Don’t forget to take RMD-related costs into consideration.