An important part of retirement planning is anticipating and managing required minimum distributions (RMDs)—the money you have to withdraw from most types of defined contribution accounts starting at age 70-1/2. Understanding which accounts are subject to RMDs, tax implications, and how much you must withdraw is the first step toward developing a withdrawal strategy that will help maximize the money you will have available in retirement.
When you reach age 70-1/2, you must start taking withdrawals, known as required minimum distributions (RMDs), from most traditional and Roth retirement accounts; the exception is the Roth individual retirement account (IRA).
RMDs can have a significant impact on retirement planning and should be considered when choosing the type(s) of retirement accounts you invest in, as well as how and when you withdraw assets from them.
Pretax contributions and earnings withdrawn from traditional accounts are subject to federal and, sometimes, state taxes (qualified Roth withdrawals are not). In addition, taxable withdrawals affect other tax-related items, such as your Medicare premium as well as how much of your Social Security benefit may be taxed.
How Much You Must Withdraw
Your RMD is determined each year by a formula based on your age and your account balance at the end of the previous year. For most individuals, the first year’s RMD is typically 3.6% of the prior year’s balance. That percentage increases each subsequent year. For example, a person who is 70-1/2 years old with a traditional IRA that had a balance of $1 million at the end of last year would typically have a $36,000 RMD, which is 3.6% x $1 million.
You may take your RMD amount as one lump sum at any point during the year or as multiple withdrawals throughout the year, as long as the total withdrawn by the end of the year is at least the required amount. You are always allowed to withdraw more than the RMD amount.
RMD & Account Type
|RMD Required||RMD Inlcuded in Taxable Income||Other Features|
|Traditional IRA||Yes||Yes||QCD option|
|Can aggregate RMD amounts with other traditional IRAs|
|Roth 401(k)||Yes||No||Can roll to a Roth IRA and avoid RMD|
|Traditional 403(b)||Yes||Yes||Can aggregate RMD amounts with other 403(b)s (including Roth)|
|Roth 403(b)||Yes||No||Can roll to a Roth IRA and avoid RMD|
|Can aggregate RMD amounts with other 403(b)s, including traditional 403(b)s|
Sally turns 70-1/2 this year and has two traditional 401(k) plan accounts with balances of $100,000 and $200,000 at the end of last year. Her traditional IRAs had balances of $300,000 and $400,000. The RMDs for the accounts are $3,600, $7,200, $10,800, and $14,400, respectively.
Sally must take exactly $3,600 from her first traditional 401(k) and exactly $7,200 from her second traditional 401(k).
For the traditional IRAs, she can add up the RMD amounts and take the $25,200 from the two accounts any way she’d like. For example, she could take the full amount from just one account or divide the total between the two.
Rules Differ by Account Type
You must calculate the RMD for each traditional IRA you own. If you have more than one traditional IRA, you can add up your total RMD amount and withdraw that from any one account or any combination of accounts. One unique feature of a traditional IRA RMD is that it can be directed to a qualified charity, which may provide positive tax and financial benefits.
Roth IRAs are not subject to RMDs.
Traditional and Roth 401(k)s
For traditional and Roth 401(k) plan accounts, you must take your RMD from each account individually. You cannot aggregate the withdrawal amounts as you can with traditional IRAs.
Traditional and Roth 403(b)s
You must calculate the RMD for each 403(b) account you own. If you have more than one 403(b), you can add up what your total withdrawal amount needs to be from all your accounts and distribute that amount from any one account or any combination of accounts, including, for example, taking your traditional 403(b) amount from your Roth 403(b) or vice-versa. While Roth 401(k)s/403(b)s are subject to RMDs, once you leave your employer, you may roll your balance into a Roth IRA, which does not require lifetime RMDs. If you fail to take your RMD, you will pay a federal tax penalty equal to 50% of the RMD that should have been distributed.
When Withdrawals Begin
You have the option to take your first RMD by December 31 in the year you reach age 70-1/2, or you can defer it until April 1 of the following year. After the first year, you must take each year’s RMD by December 31. If you defer the first year, you will need to take the first two years’ RMDs in the second year.
There is an exception. If you are still employed when you reach age 70-1/2 and your current employer’s plan allows for it, you may delay your RMD for that account until April 1 of the year following your retirement. This exception does not apply if you own 5% or more of the business sponsoring the plan.