Are You Up to Date on Required Minimum Distribution (RMD) Rules?

Reaching your 73rd birthday is something to be celebrated. When you reach this milestone, it’s important to be aware of the SECURE 2.0 Act, which says people turning 73 must begin taking out required minimum distributions (RMDs) from tax-deferred retirement accounts (traditional IRAs and 401(k)s, SEP IRAs, Simple IRAs, etc.). The deadline for your first RMD is April 1 of the year following your 73rd birthday.¹

If you don’t make these mandatory minimum amount withdrawals by December 31 each calendar year, you could end up being charged penalties. If you’re approaching 73 now, read on to see what you need to know.

Why do I have to take out required minimum distributions (RMDs)?

Congress created IRAs, 401(k) plans and other tax-deferred retirement accounts to encourage people to save for retirement. You generally contribute “pre-tax” dollars to these accounts (except for Roth IRA plans), which means the money and its investment earnings are not subject to income tax until they’re withdrawn.

Congress also decided that RMDs must be withdrawn—and taxed—every year after you reach age 73. If you don’t take your RMD on time, you’ll have to pay an “excess accumulation” tax equal to 25% of the RMD amount you should have taken. (It was 50% through the 2022 tax year.) You’ll also have to take the distribution and pay taxes on it unless you meet certain retirement conditions.

Is there always a penalty for not taking out an RMD?

In a few cases, you can delay or avoid paying an RMD. Here are a few payment exceptions:

• If you’re still employed when you turn 73, you may delay RMDs from your 401(k) or other work-based accounts until you retire without penalty. Regular IRA accounts are subject to the RMD rules regardless of your current work status.
• Roth IRAs and Roth 401(k) plans are exempt from the RMD rule. If you convert those accounts, you’ll still have to pay taxes on pre-tax contributions and earnings. If you’re over the age of 73, you must take your minimum distribution (and pay taxes on it) first before you can convert the Roth account.

RMDs typically must be taken by December 31 to avoid the penalty. If this is your first distribution, you’re allowed to wait until April 1 of the year after you turn 73. You’ll still be required to take a second distribution by December 31 that same year.

How much money do I have to take out for my RMD?

Generally, you need to calculate an RMD for each IRA or other tax-deferred retirement account you own by dividing its balance at the end of the previous year by a life expectancy factor found in one of the 3 tables in Appendix B of IRS Publication 590. Here’s what each table is used for:

• Uniform Lifetime Table: Use this table if your spouse is no more than 10 years younger than you, your spouse isn’t the sole beneficiary or you’re single.
• Joint and Last Survivor Table: This table is for those whose spouse is the sole beneficiary and more than 10 years younger than them.
• Single Life Expectancy Table: This table is for beneficiaries of inherited IRAs, which are retirement accounts whose owner has died.

Although you’ll have to calculate the RMD separately for each IRA you own, you may withdraw the combined amount from one or more of them. The same goes for owners of one or more 403(b) accounts. However, RMDs required from 401(k) or 457(b) plans must be taken separately from each account.

Understanding how RMDs work can help you avoid penalties and make the most of your retirement savings. To learn more about RMDs, read IRS Publication 590 and reach out to one of our financial advisors for assistance with your retirement finances.