Required Minimum Distributions: Guide to Withdrawing Your Retirement Savings

You’ve likely heard a thousand times how important it is to save for retirement, and how you shouldn’t touch your retirement nest egg until you absolutely have to.

However, there are times when you’ll have to start making withdrawals -- even if you don’t want to do so. These are called required minimum distributions (RMDs). 

RMDs apply to certain retirement accounts and force you to withdraw a certain amount from your account each year.

They are a pivotal part of your retirement strategy, but there are strict rules and deadlines you should be aware of so you can avoid costly penalties.

What is a Required Minimum Distribution (RMD)?

RMDs are withdrawals you have to make from most types of retirement accounts when you reach 70½ years of age.

According to the IRS:

You reach this age requirement at six calendar months after your 70th birthday. 

For example, if you turned 70 on June 30, 2021, you would have reached 70½ on December 30, 2021. You would be required to start taking RMDs from your retirement account by April 1, 2022. 

Your first RMD must be taken no later than April 1 of the year following the calendar year in which you turn age 70½. After that, RMDs must be taken by December 31 of each year.

RMDs are common for a wide range of retirement accounts, but aren’t required by all. RMDs apply to the following account types: 

• Traditional IRAs
• Rollover IRAs
• Inherited IRAs
• Simplified Employee Pension (SEP)
• Savings Incentive Match Plan for Employees (SIMPLE)
• Qualified Retirement Plans
• Individual 401(k)
• Individual 403(b)

You don’t have to take out an RMD for Roth IRA accounts unless you have inherited one. 

The amount you must take out is dependent on your account balance and your life expectancy as determined by the IRS. 

It’s important to keep track of your RMDs.

Why?

If you miss an RMD, you may be liable for a 50% penalty.

How to Calculate Your RMD

The IRS provides a worksheet you can use to determine your RMD.

If you have multiple accounts, you must calculate your RMD for each separately. 

To calculate your RMD, you need to know:

• your retirement account balance as of December 31 of the previous year
• your life expectancy according to the IRS’ uniform lifetime table on the worksheet

You divide your account balance by the distribution period. The total is your RMD for the year. 

For example, say you had $250,000 in a Traditional IRA account and you are 72 years old. You would divide $250,000 by 25.6, the distribution period for your age. The result is $9,765.62, which is what you are required to take out of your account each year. 

If your spouse is the sole beneficiary of your account and is more than 10 years younger than you, you may be able to take out a smaller RMD.

Use this worksheet to calculate your RMD instead.

RMDs and Inherited IRAs

If you inherit an IRA, the rules with RMDs is dependent on your relationship to the deceased original owner of the account.

There are three categories:

1. Spouse inheritors

If you inherit an IRA from your spouse, you can roll the assets into your own IRA, or you can transfer the assets into an Inherited IRA. 

If you decided to roll the IRA into your own account, the timing and RMD calculation would be based on your own age and your new account balance.

This option can be useful if you aren’t yet 70½ but your spouse was — you can lengthen the time of tax-deferral until you reach 70½. 

If you move the assets into an Inherited IRA, the amount of your RMDs is dependent on your age and recalculated each year.

Distributions from an Inherited IRA are not subject to a 10% early withdrawal penalty, regardless of your age.

2. Non-spouse inheritors, such as children or friends

Non-spouse beneficiaries generally need to start taking RMDs from inherited IRAs beginning in the year after the year of death of the original account owner, even if you are nowhere near retirement age.

The RMD is based on your own age and must be taken by December 31 each year.

3. Entity inheritors, such as a trust or estate

For entity inheritors, the RMD is based on the remaining life expectancy of the original owner, according to the IRS.

If the owner was younger than 70½ when they died, the assets must be completely distributed by December 31 of the fifth year following the year of the account owner’s death.

Tax Implications

Any withdrawals or tax withholding you make from your retirement accounts is reported on Form 1099-R to the IRS.

The total amount of your RMD is taxed as ordinary income at your personal federal income tax rate.

State taxes may also apply, depending on where you live. 

With your retirement accounts, you can take out more than the RMD if you wish.

However:

You should know that extra distributions don’t count toward RMD requirements in future years, and the higher amount is subject to income taxes, too. 

With your RMDs, you can choose to have federal and state taxes taken out right away, or you can opt to pay when you file your taxes in April.

Some brokerage firms will automatically set aside 10% for federal income taxes, so check with your firm to see what taxes you’ve already paid.

4 Tips for Managing Your RMDs

While taking out RMDs can be a pain, you can minimize the burden by planning for them ahead of time.

To get the most value from your accounts, consider these four tips:

1. Only take out the minimum, if possible

While you can take out more than the RMD, it may not be a good idea to do so, since you’ll pay income taxes on the full amount.

It could push you into a higher tax bracket, and money withdrawn won’t have the ability to grow.

If you don’t need the extra money, only take out the RMD.

2. You may be able to delay your RMD

If you are still working at 70½ years of age, are contributing to your company’s qualified retirement plan, and own less than 5% of the company, the government doesn’t force you to take out RMDs from that account until the year after you retire.

3. Reinvest your RMDs

If you have other income and don’t need your RMD to make ends meet, think about reinvesting it in a brokerage account.

You could invest in mutual funds, ETFs, or bonds, helping your money to continue to grow.

4. Convert your accounts to a Roth IRA

If you don’t need the accounts’ assets and don’t wish to take out any withdrawals for five years, consider converting your account to a Roth IRA.

Roth IRAs don’t have RMDs, so your money can continue to grow for as long as you leave it there, with no need to make withdrawals.

Consult an Advisor

When it comes to planning for your retirement and RMDs, it’s important to understand the basics to ensure you aren’t caught by surprise and forced to pay expensive penalties. 

However, it’s a good idea to speak with a financial advisor if you have any questions, if you’re unsure how to best handle your RMDs, or need help choosing the right investments.

A skilled fiduciary financial advisor can help you come up with a comprehensive retirement plan and minimize your tax obligations. 

If you don’t know where to start, here’s how to select a financial advisor for retirement or investment purposes.

Planning for Retirement

Whether you’re nearing retirement age or are still decades off, it’s essential that you understand how different retirement accounts work and what RMDs you have to make.

Knowing these key details can help you come up with a solid retirement plan, ensuring your long-term financial health and comfort.