What you should know about required minimum distributions (RMDs)

You may have heard that you shouldn’t dip into a retirement savings account too early. But did you know you may be penalized for dipping into it too late?

If you have a tax-deferred retirement account, like a traditional IRA or a 401(k), you generally have to start taking annual withdrawals from it the year after you turn 70½.

The minimum amount you must withdraw each year is called the required minimum distribution (RMD). If you don’t take the RMD each year, you’ll face a penalty of 50% of the amount you should have withdrawn.


 

How much do you need to withdraw?

 


Your annual RMD is generally based on how much money was in your account at the end of the previous year and how old you are. To calculate it, first determine your account balance as of last December 31, then divide that amount by your life expectancy (or “distribution period”) according to an IRS tax table. Work with your tax advisor to determine which IRS table is correct for your situation.

For example, let’s say Andrea turns 74 in 2019 and had $1 million in her retirement account on Dec. 31, 2018. According to the IRS’s Uniform Lifetime Table (PDF), her distribution period is 23.8 years. So she would divide $1 million by 23.8 to determine her RMD for 2019: $42,016.81.


Deadlines

Your first RMD typically must be taken by April 1 of the year after you turn 70½. All subsequent RMDs are due by Dec. 31 each year. That includes the second RMD, even if you took your first one in April of that same year.

Keep in mind that distributions from pre-tax accounts are considered taxable income, so taking two withdrawals in the same calendar year may bump you into a higher tax bracket. That’s why it may make sense to take the first RMD the year you turn 70½ instead of waiting until the following April—but do your homework or talk with a tax expert to determine the best timing for your situation.


Withdrawal options

You can take your RMD as a lump sum or in smaller amounts throughout the year, as long as the total required amount is withdrawn by the deadline.

You also can withdraw more than the minimum, but you’ll still need to take out the newly required amount the following year—an excess withdrawal one year isn’t credited toward the following year’s RMD.

If you have multiple retirement accounts, you’ll need to calculate the RMD for each one. However, the rules vary on whether you can withdraw all of your RMDs from just one account or if you need to take them separately from each individual account.


Exceptions

Keep in mind the following:

  • If you’re still working when you’re 70½, you may not have to take an RMD until you retire—but the requirements vary by plan. Check with your plan administrator or your financial professional.
  • If you have a Roth IRA, you do not need to take RMDs from it unless you inherited that account from someone else.
  • If your spouse is the sole beneficiary on your account and is more than 10 years younger than you, you’ll use a different IRS table to calculate your RMD—the Joint and Last Survivor Table (See Table II in Appendix B).


Talk to a pro

Calculating your RMDs and their potential impact on your taxes can be tricky. Work with your financial or tax professional and read the information available on the IRS website to ensure they are included in your overall retirement strategy.