You’ve invested diligently for years and are now close to the day when you can finally withdraw from your retirement account. The last thing you want is a penalty for overdrawing from your account and paying taxes on your hard-earned gains.
While most investors are aware of penalties for withdrawing from their IRA early, you can also be penalized if you don’t withdraw the appropriate amount of money from your retirement account each year.
Knowing how to calculate your required minimum distribution can help you avoid unnecessary penalties that could diminish your investment.
What Is the Required Minimum Distribution?
A required minimum distribution(RMD) is a minimum withdrawal you’re required to take from your Traditional SEP, SIMPLE, self-directed, or standard IRA once you reach 73. RMD requirements are set by the Internal Revenue Service (IRS) and are based on the age of retirement account holders.
RMDs are considered taxable income, and withdrawals should be included during the appropriate tax year using Form 1099-R. However, if your retirement funds were already taxed, such as in a Roth IRA, withdrawals are not included as part of your annual taxable income.
When Do RMDs Start?
If you turn 73 on or after January 1, 2023, you must begin taking RMDs by April 1 of the year following your 73rd birthday. After your initial distribution, you must continue taking annual RMDs by December 31 each year. As such, if you wait until April 1 of the following year to take your first RMD, you’ll be required to take a second RMD that year to meet the annual RMD requirement.
The RMD rules above are a recent change enacted with the passage of the 2023 Setting Every Community Up for Retirement Enhancements (SECURE) Act 2.0. Proper to SECURE 2.0, the RMD age was 72.
Tip: While you need to take an annual RMD, you don’t need to take it in one lump sum. You can choose to take your RMD as a monthly or quarterly distribution to supplement your income or meet other financial needs during retirement. Speak with a financial advisor to determine the best strategy for your personal financial situation.
How to Calculate Required Minimum Distribution?
An RMD can be calculated by dividing your account balance as of Dec 31, the previous year, by your life expectancy factor. Your life expectancy factor is an IRS-determined number based on the age to which you are expected to live.
To determine your life expectancy factor, you must use one of three tables:
- Uniform Lifetime Table
- Single Life Expectancy (Table I)
- Joint Life and Last Survivor Expectancy (Table II)
Based on your circumstances, the table below can help you determine which table to use.
| IRA Calculation Profile | Form |
| Account owner is unmarried and taking distributions for themself. | Uniform Lifetime Table |
| Account owner is married and the spouse is not more than 10 years younger. | Uniform Lifetime Table |
| Account owner is married and the spouse is more than 10 years younger. | Table II (Joint LIfe and Last Survivor Expectancy) |
| Account owner is married and the spouse isn’t the sole beneficiary. | Uniform Lifetime Table |
| You’re the beneficiary of the account but not the account owner’s spouse. | Table I (Single Life Expectancy) |
RMD calculation example
An unmarried 73-year-old with a life expectancy factor of 24.7 years and a year’s end account balance of $200,000 would have an RMD of $8,097 using the calculation below:
Account Balance (as of December 31 of the prior year) / Life Expectancy Factor = RMD
$200,000 / 24.7 = $8,097
Six tips to make sure you take the right RMD
- Calculate the RMD for each account that requires them. If you have three IRAs, you should calculate an RMD for each account.
- You can take the total withdrawal from a single account if you have multiple IRAs or 403(b) tax-sheltered annuity accounts.
- You’ll need to withdraw a separate amount from each account if you have multiple defined contribution plans, like two 401(k)s.
- Calculate your RMD each year, as both your account balance and life expectancy factor change year over year.
- Check IRS RMD rules annually, as they can change.
- Speak with a financial expert, such as your SDIRA custodian, to determine if you’re calculating your RMD correctly and ensure you avoid unnecessary penalties.
Ways to Withdraw Cash from an RMD
After you calculate your RMD, it’s time to remove that amount from your account. There are four ways to do that:
1. Cash withdrawal
Taking a cash withdrawal is the easiest way to take an RMD. You can withdraw from cash in your account, but there may not always be enough to meet your RMD requirements. In that case, you can sell assets, such as stocks and bonds. If you have an SDIRA, you may have to sell all or parts of specific assets, such as precious metals.
If you’re nearing your RMD years, speaking to a financial expert who can help you identify the best course of action and how to liquidate assets if necessary is wise.
2. Set up automatic withdrawals
If your account has the cash necessary to meet RMDs, or you are taking the necessary actions to make that possible, you can consider automatic withdrawals. In this case, your withdrawals are made as scheduled payments. Some custodians will even calculate your RMD for you, further simplifying the process.
3. In-kind transfers
If you don’t need or want to withdraw cash from your account, you can use an in-kind transfer to move assets from your retirement account to a taxable brokerage account. This lets you keep your money invested and continue earning interest, though you will have to pay taxes.
Another reason you may want to consider an in-kind transfer is if you need to take an RMD, but the market is underperforming and you want to wait it out. Moving assets from your retirement account to a brokerage account meets the RMD mandate while giving the market time to bounce back.
4. Qualified Charitable Donation (QCD)
If you have the financial bandwidth to donate money, you can use a QCD to meet your RMD. The IRS limits QCDs to $105,000 as of 2024 (up from $100,000 in 2023). Donations are not subject to federal taxes, so you can move money out of your account without worrying about taxes. Unlike regular donations, however, a QCD is not tax deductible.
Calculating your RMD can be stressful and confusing for many retirees. Let the experts at Horizon Trust help you. Contact one of our concierge team members if you need to calculate and take an RMD from one of our qualifying Traditional retirement plans.
Frequently Asked Questions: How to Calculate Your RMD
What happens if I don’t withdraw my RMD by the deadline?
If you don’t withdraw your annual RMD or if your withdrawal doesn’t meet the minimum required, the RMD amount that remains in your investment account will be taxed at 25%, or 10% if the RMD is timed correctly and takes place within two years. This is a decrease from 50% as part of the SECURE 2.0 Act. To avoid unnecessary taxation, it’s important to calculate your RMD correctly and be aware of IRS RMD deadlines.
Qualifying retirement account holders must take their initial distribution by April 1, and all subsequent distributions must be made by December 31. During the first qualifying year, account holders typically must make an initial withdrawal by April 1 of that year and another by December 31 of that same year.
What retirement plans have an RMD?
If you have any of the following retirement accounts, you’ll need to plan for an annual RMD that meets IRS requirements:
- Traditional IRA
- SEP
- SIMPLE IRA
- SARSEPs
- 401(k) plans
- 403(k) plans
- 457(b) plans
- Profit-sharing plans
How do I avoid the required minimum distribution?
In most cases, you can avoid RMDs by converting your retirement plan to a Roth IRA, essentially rolling your existing retirement balance into a tax-free retirement account. However, that does not mean you’ll avoid taxes altogether. If you choose this method, you’ll need to pay taxes on the funds going into the new Roth IRA.
If your retirement account is employer-based, like a 401(k), then you can put off paying RMDs by working longer; however, that’s not an option for IRA account holders.
Can I reinvest my RMD?
Yes, you can reinvest your RMD, but the funds cannot be deposited into a tax-advantaged retirement account. Taxable brokerage accounts are a popular option for individuals looking to reinvest but speak to a financial expert to determine what investment options are best for you.
Can I take out more than my RMD?
Yes, you can take out more than your required minimum distribution. However, as long as you meet your required RMD, you’re not penalized for additional funds to cover living expenses, investment goals, charitable contributions, etc.
Following IRS guidelines and taking out the appropriate annual distribution will help you avoid unnecessary penalties and make the most of your retirement funds.
Ultimately, by understanding the rules governing RMDs, you can avoid taxes on your withdrawals and protect your wealth.
Do I really need to take an RMD?
Yes, the IRS requires account holders to take an RMD for most tax-advantaged accounts. If you fail to take the RMD, you must pay 25%. If you fail to take an RMD, you can file Form 5329 with a letter explaining the reason you neglected to take the RMD. If you’re taking steps to remedy the situation and failure was due to a “reasonable error,” the IRS may waive the penalty.
How do RMDs impact taxes?
RMDs are taxed as ordinary income. As such, your RMD can increase your tax liability depending on your annual income and the current tax bracket. A financial expert can help you determine the best ways to take RMDs based on your tax circumstances.
