RMD (Required Minimum Distributions) — what is it and how does it work?

This is an educational and informational guide — it is NOT legal, tax, medical, or financial advice. Data may be outdated — always verify on the official website and with a licensed professional.

Introduction / Who is this for

If you have savings in traditional retirement accounts such as a Traditional IRA or 401(k), this guide is for you. Required Minimum Distributions (RMD) can be complicated, and understanding them is crucial to avoid penalties and effectively manage your finances in retirement. In this article, we will explain what RMD is, when you need to start taking them, and how to calculate their amount.

What is RMD?

RMD (Required Minimum Distributions) are the minimum amounts you must withdraw from certain retirement accounts when you reach a specified age. The purpose of RMD is to ensure that retirement savings are used during the retiree's lifetime and not left in accounts for inheritance. In the U.S., the age at which you must start taking RMD is currently 73 years, and starting in 2033, it will increase to 75 years according to the SECURE 2.0 Act.

When do you need to start taking RMD?

You must start taking RMD when you reach the age of 73. If you were born after June 30, 1949, you will need to start withdrawals at age 73. Individuals born after January 1, 1951, will need to start withdrawals at age 75. It is important to remember that RMDs are mandatory, and failing to take them can result in significant penalties.

How to calculate RMD?

Calculating RMD involves dividing the value of your retirement account by the life expectancy determined by tables published by the IRS (Internal Revenue Service). The account value is the amount that was in the account at the end of the year preceding the year in which you must start withdrawals. Life expectancy tables may vary based on your age and status (individual, married, etc.).

Example of RMD calculation

Assume you are 73 years old and the value of your account is $100,000. If the IRS table indicates a life expectancy of 27.4 years, your RMD would be:

RMD = $100,000 / 27.4 = $3,649.64

Which accounts are subject to RMD?

RMD primarily applies to traditional retirement accounts such as:

• Traditional IRA
• 401(k)
• 403(b)

Accounts that are not subject to RMD include:

• Roth IRA
• spousal retirement account (if it is a Roth)

What happens if you do not take RMD?

If you do not withdraw the required minimum amount, the IRS will impose a penalty of 50% on the amount not withdrawn. This means that if your RMD is $3,000 and you do not take it, you will have to pay a penalty of $1,500.

Common mistakes

• Failure to take the RMD.
• Incorrect calculation of the RMD amount.
• Not considering the account value at the end of the year.
• Lack of documentation for RMD withdrawals.

What’s next?

1. Check your retirement accounts and determine when you need to start taking RMD.
2. Calculate your RMD according to IRS tables.
3. Consult a financial advisor to ensure you understand all the rules.
4. Make sure you withdraw RMD on time to avoid penalties.

Sources

More information about RMD can be found on the following websites:

• IRS — Required Minimum Distributions
• SSA — Social Security Administration
• FINRA — Required Minimum Distributions