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Understanding RMD's

Updated: Dec 20, 2023

What Is a Required Minimum Distribution (RMD)?

A Required Minimum Distribution (RMD) is an important concept in the world of retirement planning. It's essentially the amount of money you're required to withdraw annually from your tax-deferred retirement accounts once you reach a specific age. This is a critical part of managing your retirement savings wisely, and in this friendly and educational guide, we'll explore what RMDs are, why they matter, how to calculate them, and what you need to know about them.

Why Do RMDs Exist? Their primary purpose is to ensure that individuals don't benefit from the tax-deferred growth of their retirement accounts indefinitely. In other words, they prevent people from using these accounts solely as a way to pass wealth on to their heirs, rather than using them for their intended purpose: funding their retirement.

Additionally, RMDs help in managing your tax obligations. By taking out a certain amount from your retirement accounts each year, you can spread out the tax liability, potentially reducing the amount you owe. This is because the money is distributed in the current year, as opposed to deferring it to a later date when it might be subject to higher tax rates.

How to Calculate Your RMD

Calculating your RMD may sound complex, but it's based on two key factors: your age (life expectancy factor) and the total value of all your retirement accounts. To do the math, you'll need to divide your previous year's account balance by a distribution period based on your age.

An easy way to estimate your RMD is by using the IRS's "Uniform Lifetime Table," which considers your life expectancy based on various actuarial factors. You can also find helpful RMD calculators on websites like

RMD Age Requirements

RMDs come into play when you reach a specific age, typically 72. However, as of 2023, if you turn 72 after December 31, 2022, you'll start your RMDs at age 73. The deadline for taking your first RMD is April 1st of the year following the year you reach this age.

It's essential to remember that you must calculate and withdraw your RMD every year, even if you've previously withdrawn the maximum amount allowed by the IRS in prior years.

One significant change introduced by the SECURE Act is that beginning in 2024, holders of designated Roth 401(k) accounts are no longer required to take RMDs. This rule already applies to Roth IRAs.

What Happens if You Don't Take Your RMD?

Failing to take your RMD can have costly consequences. The IRS imposes a substantial penalty of 50% on the amount that should have been withdrawn. For example, if your RMD for the year is $20,000, and you neglect to withdraw it, you'd face a $10,000 penalty. Therefore, taking out the exact RMD amount each year is crucial to avoid these hefty penalties.

RMDs and Inherited IRAs

Inherited IRAs, also known as "beneficiary IRAs," come into play when you receive someone's individual retirement account after their passing. The rules for RMDs in these situations depend on the multiplier the original account owner used during the year they passed away.

Furthermore, the rules for beneficiary RMDs vary based on your identity in the years after the account owner's death. These identities include surviving spouse, minor child, and disabled individual.

If you are the sole beneficiary of your spouse's IRA, you can opt for a spousal transfer, allowing you to treat the IRA as if it were yours from the beginning. This means RMDs will be based on your life expectancy, not the deceased's.

The rules for calculating RMDs for inherited IRAs differ depending on when the account owner passed away, either before or after January 1, 2020. The SECURE Act also introduced changes that affect eligible, designated, and non-designated beneficiaries, which can impact the timeframe and calculation of your RMD.

Here are a few more things to keep in mind about RMDs:

  • You don't have to take your entire RMD all at once; you can split it into multiple distributions throughout the year.

  • You can donate up to $100,000 of your RMD to a qualified charity, potentially lowering your taxable income.

  • If you have multiple retirement accounts, you must calculate an RMD for each one to ensure compliance and avoid penalties.

Final Thoughts

Understanding the rules and regulations surrounding RMDs is vital for retirees who want to make the most of their retirement accounts. Accurate calculation and timely withdrawal of the required minimum each year are essential to avoid penalties. If you inherit an IRA, it's crucial to comprehend the rules based on the account owner's age at the time of their death and your beneficiary status in the years that follow.

As always, consulting a financial planner can be a wise move to navigate these rules effectively and make informed decisions during tax season. They can provide personalized guidance to help you optimize your retirement savings and avoid potential pitfalls associated with RMDs.


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