Minimum Required Distributions (RMDs) are the minimum amount you must withdraw from certain tax-advantaged retirement accounts. They begin at age 72 or 73, depending on the circumstances, and continue indefinitely. Unfortunately, there is no age at which RMDs stop. You must continue to take them for the life of the account. You may want to work with a professional financial advisor to help you make a retirement withdrawal strategy that works for you.
What are required minimum distributions?
A required minimum distribution is the minimum amount you must withdraw each year from certain tax-advantaged retirement accounts. This law primarily applies to pre-tax accounts such as 401(k) and IRA plans. You are not required to make minimum withdrawals from Roth IRAs, although, in one exception to this rule, you are required to make minimum distributions from Roth 401(k)s.
The IRS requires minimum distributions as a way to ensure that you pay taxes eventually. Pre-tax accounts represent a basket of money on which you never paid income tax or capital gains tax. For some retirees, particularly the wealthier ones, without an RMD, they could keep that money indefinitely and eventually hand it over to their heirs tax-free. (For more information on how this would work, see our articles on the escalation loophole.)
This is why the IRS does not require minimum distributions from Roth IRAs. Because a Roth IRA is a post-tax retirement account, you’ve already paid income tax on the money, and the IRS doesn’t need to guarantee that you make withdrawals.
How much are the required minimum distributions?
The specific amount you should withdraw varies depending on your age and the amount in your retirement account. The IRS lists this in Publication 590. There you can look up your current age and find a life expectancy factor based on that age. You divide the value of your retirement account by this life expectancy factor to figure out how much you should withdraw.
The minimum required distributions are annual, which means you can structure these withdrawals as you see fit throughout the year, but you must have reached the minimum amount by December 31st. Otherwise, the IRS will charge you a tax penalty. This penalty is normally set at 50% of the difference between what you withdraw and what you should have withdrawn.
For example, let’s say you have a life expectancy factor of 10 and $60,000 in your retirement account. You must withdraw at least $6,000 by the end of the year. If, instead, you only withdraw $5,000, the IRS will charge you a fee of $2,500.
It is important for investors to note that they do not need to keep this money in cash. You can reinvest that money in a private investment portfolio if you don’t need to spend it.
When do the required minimum distributions start?
The start date for required minimum distributions has been reversed a few times over the years, most recently with the SECURE 2.0 Act. If you turned 72 during or before the year 2022, you must begin receiving required minimum distributions from Qualifying Retirement Accounts in the last of the following:
On April 1, one year after turning 72
For work plans, April 1 of the year following your retirement
As of January 1, 2023, the age of the RMD increases to 73 years. This means that if you turn 72 in 2023 or later, you must begin receiving required minimum distributions from qualifying retirement accounts in the last of the following:
On April 1, one year after turning 73
Or, for work plans, April 1 of the year following your retirement
This age limit will increase over the next 10 years, reaching 75 in 2033.
For example, let’s say Elizabeth is currently retired and turns 73 in October 2023. She should start receiving minimum distributions from her Qualified Retirement Accounts beginning April 1, 2024. On the other hand, say that she is still working . In that case, the same rule will apply to her IRA, but she can defer withdrawals in her 401(k) until the year after she retires.
When do the required minimum distributions stop?
The required minimum distributions do not stop. There is no age limit for this rule, nor are payments eliminated on any basis other than finances. Their required minimum distributions are based on an account’s underlying assets, which means that if a retirement account runs out of money, you no longer have any associated withdrawal requirements.
Also, please note that each retirement account category is handled separately for RMD requirements. For example, if you have a 401(k) and an IRA, you will need to calculate and make minimum withdrawals from each account. The amount of money you withdraw from your 401(k) will not apply to the RMD for your IRA. However, if you have multiple IRA accounts, you can withdraw the full amount owed from a single wallet.
Finally, if you fail to make minimum withdrawals, the IRS will sometimes waive penalty fees if you can show that the shortfall was due to “reasonable error” and that you are correcting it. However, you cannot use excess withdrawals from a prior year to meet your RMD requirements for a future year.
There is no maximum age for the required minimum distributions. For any qualifying retirement account, you must continue to make these withdrawals indefinitely. This is an important piece of the puzzle to consider in any retirement strategy so that you can be prepared for your entire life.
retirement planning tips
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If the IRS sets its minimum distributions, it’s important to plan for the type of distributions you want to get from your portfolio.
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