Free Guide to Required Minimum Distributions and Common Mistakes

Understanding Required Minimum Distributions: What They Are and Why They Matter

Required Minimum Distributions, commonly called RMDs, are annual withdrawals that retirement account owners must take from certain retirement savings accounts once they reach a specific age. The IRS established this rule to ensure that people don't use retirement accounts as permanent wealth-building tools without ever paying taxes on the money inside them. Understanding RMDs is important because failing to withdraw the correct amount can result in serious tax penalties.

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The RMD rules apply primarily to traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored retirement plans like 401(k)s, 403(b)s, and 457 plans. Roth IRAs have different rules during the account owner's lifetime, which we'll cover in detail later. The amount you must withdraw each year depends on your age, the total balance in your retirement accounts, and life expectancy tables created by the IRS.

As of 2023, the age at which RMDs begin changed. The SECURE Act 2.0, passed in late 2022, gradually raised the starting age for RMDs from 72 to 73. For people who turned 72 in 2023 or later, their first RMD is due at age 73. However, anyone who was already 72 before January 1, 2023, still follows the age-72 rule. This change affects millions of Americans, and understanding which rule applies to you matters for tax planning.

RMDs are calculated using a specific formula: you divide your retirement account balance (as of December 31 of the previous year) by a life expectancy factor found on IRS tables. The three main IRS tables are the Uniform Lifetime Table, the Single Life Expectancy Table, and the Joint and Last Survivor Table. Most people use the Uniform Lifetime Table, but your specific situation determines which table applies to you.

Practical Takeaway: Write down the year you turn 73 (or 72 if you were already 72 before January 1, 2023). This is when your first RMD becomes due. Understanding this timeline helps you prepare financially and avoid unexpected tax bills or penalties.

Calculating Your Required Minimum Distribution: The Step-by-Step Process

Calculating an RMD involves straightforward mathematics, though the process has several components. The calculation starts with determining your account balance on December 31 of the year before you need to take the distribution. This is called the "valuation date." If you have multiple retirement accounts of the same type, you must add all the balances together to get your total account value for calculation purposes.

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Once you have the total balance, you'll find the appropriate life expectancy factor on an IRS table. For most people, the Uniform Lifetime Table is correct. You find your age on this table and read across to locate your life expectancy factor—a number that typically ranges from 14.8 to 27.4 depending on your age. Then you divide your total account balance by this factor. The result is your RMD for that year.

Here's a concrete example: Let's say you're 75 years old with a December 31 balance of $400,000 in your traditional IRA. According to the Uniform Lifetime Table, the factor for age 75 is 24.6. You divide $400,000 by 24.6, which equals $16,260.16. That's your RMD for the year—you must withdraw at least that amount by December 31.

The calculation changes each year because both your account balance and your age factor change. As you age, the life expectancy factor decreases, which means you must withdraw a larger percentage of your account. For example, at age 80, the factor is 20.2; at age 90, it's 11.4. The older you get, the more you must withdraw annually.

If you have multiple types of retirement accounts, the rules differ slightly. For traditional IRAs and SEP IRAs, you calculate the RMD for each account separately, but you can aggregate them and take the total from any one IRA. For employer-sponsored plans like 401(k)s, you must generally take the RMD from that specific plan—you cannot combine them with IRA calculations. This distinction matters when you have accounts at different financial institutions.

Practical Takeaway: Gather statements from all your retirement accounts showing the December 31 balance from the previous year. Use the IRS Uniform Lifetime Table (available on the IRS website and in Publication 590-B) to find your life expectancy factor, then divide each account balance by the factor. Write down the total RMD amount you owe for the year so you can plan the withdrawal.

Common Mistake #1: Missing the Deadline and Facing Substantial Penalties

The RMD deadline is December 31 of the year for which the distribution is required. Missing this deadline is one of the most common and costly mistakes people make with retirement accounts. The IRS imposes a penalty of 25% on the amount you failed to withdraw, and this penalty was increased from 50% under previous rules but is still substantial. If your RMD was $10,000 and you didn't withdraw it, you could face a $2,500 penalty in addition to owing the income taxes on that amount.

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One reason people miss the deadline is simply not knowing when their first RMD is due. Someone might retire at 60, open an IRA rollover account, and forget that when they turn 73, they have only a few months to take their first RMD. Banks and financial institutions are not required to remind you about RMD deadlines, though some do send notices. The responsibility falls entirely on you to track the date and ensure the withdrawal happens in time.

Another common situation involves people who are still working at age 73 in a job where they participate in their employer's retirement plan. The "Still-Working Exception" allows some employees to delay their RMD from their current employer's plan (though not from IRAs or plans from previous employers). However, this exception only applies if you don't own more than 5% of the company. Many people are unaware of this rule and either take unnecessary distributions or miss the deadline thinking they're covered by the exception.

The first RMD has special timing rules that often confuse people. Your first RMD must be taken by December 31 of the year you turn 73 (or 72 under the old rules). You cannot delay it to the following year, unlike some subsequent distributions. If you miss this deadline by even one day, the penalty applies.

To protect yourself, consider setting calendar reminders for September or October of the year your RMD is due. This gives you time to contact your financial institution and arrange the withdrawal before the December 31 deadline. If you have multiple accounts, list each one with its deadline. Some people arrange automatic distributions quarterly or monthly to ensure they meet the annual requirement without rushing at year-end.

Practical Takeaway: Add December 31 to your calendar for every year starting when you turn 73 (or 72 if applicable). Contact your bank, brokerage firm, or plan administrator by October of that year to arrange your RMD withdrawal. If you miss the deadline, contact a tax professional immediately—the IRS may waive the penalty if you correct the mistake quickly and have a reasonable cause.

Common Mistake #2: Taking the RMD from the Wrong Account or Calculating It Incorrectly

People with multiple retirement accounts often make mistakes about which account to withdraw from or how to combine calculations across accounts. The rules differ depending on whether you're dealing with IRAs or employer-sponsored plans, and getting this wrong can result in taking too little from your accounts and facing penalties.

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For IRAs, the aggregation rule allows you to add up the RMDs from all your traditional IRAs, SEP IRAs, and SIMPLE IRAs, then withdraw the total from any one or more of these accounts in any combination you choose. This flexibility is helpful—you might calculate RMDs from five different IRAs but withdraw the entire year's amount from just one account. However, you cannot aggregate IRA RMDs with employer-sponsored plan RMDs. If you have a 401(k) from a previous job and a traditional IRA, you must calculate RMDs for each separately and take the 401(k) RMD from that plan.