Required Minimum Distributions Explained: When They Start, How They're Calculated, and Penalties

Traditional IRAs, 401(k)s, and similar tax-deferred accounts let money grow without current tax, but not forever. Eventually, the law requires you to take required minimum distributions (RMDs) each year, and those withdrawals are generally taxed as ordinary income.

The short version

• RMDs currently begin at age 73. Under current law, the starting age is scheduled to rise to 75 for people born in 1960 or later.
• Your first RMD can be delayed until April 1 of the year after you reach the starting age, but then you'd take two RMDs in that year.
• Each year's RMD is the prior December 31 balance divided by a factor from the IRS Uniform Lifetime Table (other tables apply in some cases).
• Roth IRAs and Roth accounts in employer plans don't require RMDs during the owner's lifetime.
• If you're still working, you can usually delay RMDs from your current employer's plan (not IRAs) unless you own more than 5% of the company.
• Missing an RMD triggers an excise tax of 25% of the shortfall, reduced to 10% if corrected within the allowed time.

How the calculation works

Selected distribution periods from the Uniform Lifetime Table:

The Joint and Last Survivor Table applies if your spouse is your sole beneficiary and more than 10 years younger. Inherited accounts use different rules.

A worked example

A hypothetical $800,000 traditional IRA at age 73, earning 5% a year, with only the RMD withdrawn each year:

RMDs start below 4% of the balance and rise every year. Even at 5% growth, the balance begins declining in the early 80s. And because RMDs are taxable income, they can push retirees into higher brackets and affect Medicare premium surcharges and how much Social Security is taxed.

Rules that trip people up

The first-year double. Delaying your first RMD to April 1 of the following year means taking two RMDs in one tax year: the delayed first one and the second year's. That can bunch taxable income.

Multiple IRAs. You calculate the RMD for each IRA separately, but you can take the total from any one or more IRAs.

Multiple employer plans. Each 401(k) generally must distribute its own RMD separately.

Still working. The exception for employer plans applies only to the plan of your current employer and not to IRAs, and not if you own more than 5% of the business.

Inherited accounts. Beneficiaries face different rules, including 10-year payout requirements for many non-spouse beneficiaries. Check IRS guidance carefully.

Penalties and fixing mistakes

If you don't take the full RMD, the shortfall is subject to a 25% excise tax, which drops to 10% if you correct it within the allowed time. The IRS may waive the penalty for reasonable error if you take the missed distribution and request a waiver on the appropriate form with an explanation.

Planning ideas

• Roth conversions before RMDs begin can reduce future RMDs; see Roth conversions: the basic math.
• Qualified charitable distributions from IRAs, for those eligible, can satisfy RMDs without the amount being included in income.
• Withdrawals before RMD age in low-income years can smooth taxable income.

A tax professional can model these choices with your specific accounts.

The takeaway

RMDs start at 73 for now, are calculated by dividing your prior year-end balance by an IRS table factor, and grow as a share of the account every year. Know your deadlines, take them from the right accounts, and plan ahead to manage the tax impact.

Sources

• IRS: Retirement plan and IRA required minimum distributions FAQs
• IRS: Publication 590-B, Distributions from IRAs
• IRS: RMD comparison chart (IRAs vs. defined contribution plans)