An RMD, or required minimum distribution, is the minimum amount of money that you are legally mandated to withdraw each year from a retirement account (beginning at age 73 in 2023).
The amount you must withdraw is calculated using your account balance on the final day of the prior year and a “life expectancy factor” (based on your age) determined by the IRS.
If you don’t withdraw RMDs on time, you could face penalty of up to 25 percent (in addition to ordinary income tax on the distribution).
Patrick Horning is a senior director of Advanced Planning at Northwestern Mutual.
Once you reach your 70s, it’s time to get familiar with a new acronym (one the grandkids may not be able to bring you up to speed on): RMDs. That’s because once you hit 73 (72 if you turned 72 prior to the start of 2023), the IRS requires you to begin taking RMDs—or required minimum distributions—from your 401(k), IRA or other tax-deferred retirement plan.
An RMD, or required minimum distribution, is the minimum amount of money that you are legally mandated to withdraw each year from most employer-sponsored retirement plans and IRAs. Miss the annual RMD deadline and you could face a stiff penalty of up to 25 percent of the amount you should have withdrawn—plus ordinary income tax.
If you’re going to be affected by RMDs in the next few years, it’s a good idea to learn the rules so you can avoid common RMD pitfalls. Here are seven important things you should know about RMDs.
1. Be aware of your RMD deadlines
RMDs must be taken no later than December 31 of the appropriate year. However, Congress gives you a little leeway for the timing of your first distribution. You actually have until April 1 of the calendar year following the one in which you turn the appropriate age to take your first distribution.
A few years ago, the required RMD age was 72; however, thanks to the SECURE Act 2.0, the required beginning date for RMDs is now when you reach age 73 for most people (In a few years, this age will rise to 75.) That means if you turn 73 in 2023, you’d have until April 1 of 2024 to take your first distribution. Each subsequent distribution needs to be withdrawn by December 31 each year.
2. Just because you can delay your first RMD doesn’t mean that you should
Before delaying your first RMD, you’ll want to check its impact on your taxes. Delaying distribution until April 1 following the year in which you reach the appropriate age means that you’ll need to take your first and second distributions in the same calendar year. This could bump you into a higher tax bracket; it could also make you subject to the Medicare high-income surcharge. This applies if your 2023 income exceeds $97,000 if you are single or $194,000 if you are married and file jointly. The extra income also may mean that a larger portion of your Social Security benefits will be subject to taxes.
If you need help determining whether delaying would be beneficial to your situation, consulting with a financial advisor could be a helpful resource in developing your strategy.
3. Calculating your RMD is easier than you might think
If you’re wondering how to calculate your RMD, you can do so with a relatively simple calculation that involves dividing your retirement account balance(s) as of Dec. 31 of the prior year by a life expectancy factor (based partially on your age) that is set by the IRS. Each year, the IRS publishes worksheets and uniform tax tables to guide you through the calculation.
So, what is an example of an RMD? Get a calculator ready. A married IRA owner who turned 75 this year (and whose sole IRA beneficiary is a spouse who is not more than 10 years younger) has an end-of-year balance of $250,000. To calculate that year’s RMD, the owner would divide that balance by a life expectancy factor of 24.6 for an RMD of $10,162.60.
If you have multiple IRAs (traditional, rollover, Simplified Employee Pension or SEP and SIMPLE IRAS), you will need to calculate the RMD for each account separately. You can then aggregate the amounts and withdraw your RMDs from any one (or more) of your IRAs—just make sure that you meet the total. (If you have a Designated Roth account—401(k), 403(b) and 457(b)--you’re not required to take RMDs from that Roth account as of 2024.)
Your qualified plan administrator is responsible for calculating the RMD from your 401(k), 403(b), SIMPLE 401(k) and section 457(b) plan. Many retirees have worked for different employers and might have several 401(k) accounts. Unlike IRAs, qualified plan accounts are not aggregated, so each plan administrator will calculate and send the distribution amount.
As you calculate your RMD, you’ll want to keep in mind that your distributions will impact your income, which could push you into a different federal or state income tax bracket. For example, if you are single and your income hovers around $95,000, a sizable distribution could force you into the 24 percent federal tax bracket.
4. Do you have to take an RMD if you’re still working?
The answer to this question depends on what type of retirement account you have. For a traditional IRA, you’re required to take RMDs once you reach the appropriate age whether you are working or not. (A Roth IRA has no RMD requirements while the owner is alive.)
If you participate in an employer-sponsored plan, you may be able to postpone taking RMDs from the plan until you retire—unless you own more than 5 percent of the company you work for. You also might be able to avoid RMDs on IRAs or other 401(k) plans by rolling those assets into your current employer-sponsored plan, if possible.
5. There are different ways to meet RMD requirements
RMDs don’t necessarily need to be in the form of cash withdrawals from your retirement account. There are other transactions that would satisfy your RMD requirement and could offer additional tax benefits in the long run.
Make an in-kind transfer
If your living expenses are covered and you don’t need the money, remember that you don’t have to take the distribution in cash. You can move it into a brokerage account as an “in-kind transfer” and still meet IRS RMD requirements. Of course, this portion of your retirement savings is then subject to the ups and downs of the financial market. This does not avoid or mitigate taxation.
Take a qualified charitable distribution
Feeling philanthropic? Another option is the qualified charitable distribution (QCD) rule. It allows you to transfer up to $100,000 from a traditional IRA to a public charity. The donation could be a way to meet your required minimum distribution.
Purchase a Qualified Longevity Annuity Contract
Yet another option is to purchase a Qualified Longevity Annuity Contract (QLAC), which is an insurance contract that provides a guaranteed income for life. A QLAC is a type of deferred income annuity, meaning you choose to defer the income you’ll receive at a future date. In 2023, you’re able to defer income up to age 85, so a QLAC can be a creative way to delay RMDs on retirement funds.
6. RMD mistakes can cost you
Unfortunately, you can’t hold on to your retirement savings forever. The RMD rules are designed to ensure that the IRS eventually gets to collect taxes on your retirement plan earnings and investment gains. As a result, the penalty for failing to comply with RMD requirements is steep.
If you don’t take your distributions on time or calculate the amount incorrectly, you’ll owe a 25 percent penalty on any RMD amounts you should have taken in addition to the ordinary income tax you’ll owe for the distribution. (Prior to 2023, the penalty was 50 percent.) For example, if your RMD is $10,000 from an IRA and you only took $5,000, you’ll pay up to $1,250 in tax penalties plus your ordinary income tax ranging from 10 to 37 percent.
This penalty can be lowered to 10 percent, however, if you correct the violation in a timely manner.
7. A financial advisor can help
The best way to be prepared for RMDs is to have a solid retirement plan. Knowing what to expect in the future and creating a diversified retirement plan can help you minimize your tax impact and make the most of your hard-earned savings. Whether you’re just starting to save or approaching retirement, a Northwestern Mutual financial advisor can help you develop a plan that meets your financial situation and retirement goals.
This publication is not intended as legal or tax advice. Financial Representatives do not render tax advice. Consult with a tax professional for tax advice that is specific to your situation.
As an attorney in Sophisticated Planning Strategies, I work with Northwestern Mutual financial advisors as they help clients achieve financial security.