When Do I Need to Start Taking Required Minimum Distributions (RMDs)?
Are you scratching your head over when you need to begin taking Required Minimum Distributions (RMDs) from your retirement accounts?
You’re not alone. Congress has made several changes to RMD rules over the last several years, including the age at which you need to begin taking them.
Understanding and strategically planning for your eventual RMDs could help you save thousands on taxes throughout your retirement.
What Are Required Minimum Distributions (RMDs)?
RMDs are the minimum amounts that a retirement-account owner must withdraw annually, starting at a specific age. These withdrawals are required by the IRS to make sure that you’re eventually pay taxes on your tax-deferred retirement savings.
After all, you probably got a tax deduction when you saved into your retirement accounts and also appreciated tax-deferred growth throughout the years.
The IRS wants you to pay up at some point, and they’ve defined the age at which you need to start dwindling down certain retirement accounts and subsequently paying income taxes on those withdrawals.
Types of Accounts Subject to RMDs
RMD rules apply to various retirement accounts, including:
Traditional Individual Retirement Accounts (IRAs)
SEP IRAs
SIMPLE IRAs
401(k) plans
403(b) plans
457(b) plans
Age Requirements for RMDs
The age at which RMDs must begin has changed over time due to legislative updates. Historically, RMDs started at age 70½, but recent changes have shifted this age requirement.
Pre-SECURE Act Rules:
Before the SECURE Act of 2019, individuals were required to start taking RMDs from their retirement accounts at age 70½.
The SECURE Act of 2019:
The Setting Every Community Up for Retirement Enhancement (SECURE) Act—signed into law in December 2019—brought significant changes to retirement account rules, including RMDs. One of the key changes was raising the RMD age from 70½ to 72. This adjustment came about due to increased life expectancies, and it ultimately allows individuals to keep their savings in their retirement accounts longer, potentially resulting in more tax-deferred growth.
The SECURE Act 2.0:
As part of the Consolidated Appropriations Act of 2023, the SECURE Act 2.0 further adjusted the RMD age, reflecting the continuous evolution of retirement-planning rules. The SECURE Act 2.0 increased the RMD age to 73 for individuals who turn 72 after December 31, 2022, and before January 1, 2033. For those born after January 1, 1960, the RMD age will increase to 75.
Below are the ages at which you must begin taking RMDs (based on your birth date):
Born before July 1, 1949: RMDs start at age 70½
Born between July 1, 1949, and December 31, 1950: RMDs start at age 72
Born after December 31, 1950, and before January 1, 1960: RMDs start at age 73
Born after January 1, 1960: RMDs start at age 75
Calculating RMDs
Your RMD amount is calculated based on your account balance at the end (December 31) of the previous year and a life expectancy factor provided by the IRS. The IRS publishes life expectancy tables, such as the Uniform Lifetime Table, which is used to calculate your RMD each year.
Steps to Calculate your RMD:
Determine your Account Balance: Find the balance of your retirement account as of December 31 of the previous year.
Find the Life Expectancy Factor: Use the appropriate IRS life expectancy table to find the factor that corresponds to your age.
Calculate the RMD: Divide the account balance by the life expectancy factor.
Example Calculation
Suppose you have a traditional IRA with a balance of $500,000 as of December 31, and you are 72 years old. According to the Uniform Lifetime Table, the life expectancy factor for age 72 is 25.6. Your RMD for the year would be calculated as follows:
$500,000 / 25.6 = $19,531.25
Further, let’s say you fall in the 24% marginal tax bracket for this year. You would need to pay $4,687.50 (25%) from your withdrawal in federal taxes.
You can either withholding for federal taxes at the time you make your RMD—and in doing so, receive a post-tax distribution of $14,843.75—or you can withholding nothing and pay your tax bill when you file your tax return next spring.
Special Considerations
Aggregating Accounts
If you have multiple retirement accounts of the same type (e.g., multiple traditional IRAs), you can aggregate the balances and take the RMD from one or more of these accounts. However, RMDs for different types of retirement accounts cannot be aggregated. For example, you cannot take the RMD for a 401(k) from an IRA.
Still Working Exception
For employer-sponsored retirement plans like 401(k)s, you can delay RMDs if you are still working and do not own more than 5% of the company. This exception does not apply to IRAs.
Penalties for Missing RMDs
If you miss an RMD, you could incur a hefty penalty. The IRS imposes an excise tax of 25% on the amount that should have been withdrawn but was not (it used to be 50%!). That said, your penalty can be further reduced to 10% if the mistake is corrected in a timely manner.
Legislative Updates Impacting RMDs
The SECURE Act of 2019
The SECURE Act was a significant legislative change that impacted RMD rules, among other aspects of retirement planning. Key provisions include:
Increase in RMD Age: Raised the RMD age from 70½ to 72.
Elimination of Stretch IRAs: Beneficiaries of inherited retirement accounts (non-spouse) must withdraw the entire balance within 10 years, rather than stretching distributions over their lifetimes.
The SECURE Act 2.0 of 2023
The SECURE Act 2.0 further refined the rules established by the original SECURE Act. Key changes include:
Increase in RMD Age: Raised the RMD age to 73 for those turning 72 after December 31, 2022, and to 75 for those born after January 1, 1960.
Reduction in RMD Penalty: Reduced the penalty for failing to take RMDs from 50% to 25%, and potentially to 10% with timely correction.
Qualified Charitable Distributions (QCDs): The act adjusted rules around QCDs, allowing individuals to make tax-free charitable contributions directly from their IRAs starting at age 70½, even if they are not yet subject to RMDs.
Read more about retirement changes with the SECURE Act 2.0.
Strategies for Managing RMDs
Charitable Contributions
As mentioned, Qualified Charitable Distributions (QCDs) can allow you to satisfy your RMD by making a direct transfer from your IRA to a qualified charity. This can reduce taxable income and also support charitable causes.
Tax Withholding
Consider setting up tax withholdings on your RMDs to cover the potential tax liability. This can help manage your tax burden and avoid underpayment penalties.
Roth Conversions
Converting traditional IRA assets to a Roth IRA can reduce future RMDs since Roth IRAs are not subject to RMDs during your lifetime. This strategy involves paying taxes on the converted amount in the year of conversion, so it requires careful tax planning.
Check out our tips for using Roth conversions in your retirement plan.
Multi-Year Distribution Planning
Spreading out distributions over several years can help manage tax brackets and minimize the tax impact. This strategy is particularly useful for those approaching the age for RMDs.
Do you have questions about your RMDs in retirement? Reach out to me at Ben@coveplanning.com or schedule a free consultation call.
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Ben Smith is a fee-only financial advisor and CERTIFIED FINANCIAL PLANNER™ (CFP®) Professional with offices in Milwaukee, WI, Evanston, IL and Minneapolis, MN, serving clients virtually across the country.
As a Certified B Corporation, Cove Financial Planning provides comprehensive financial planning and investment management services to individuals and families, regardless of location, with a focus on Socially Responsible Investing (SRI).
Ben acts as a fiduciary for his clients. He does not sell financial products or take commissions. Simply put, he sits on your side of the table and always works in your best interest. Learn more how we can help you Do Well While Doing Good!
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Ben Smith, and all rights are reserved. Read the full Disclaimer.