Required minimum distributions

What is a required minimum distribution? 

A required minimum distribution (RMD) is the IRS-mandated minimum amount you must withdraw from your retirement accounts annually. These rules ensure that tax-deferred savings are eventually taxed as income.

Who must take an RMD?

RMD rules apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored retirement plans like 401(k), 403(b), and 457(b) plans. 

• Age requirements: You generally must start taking these withdrawals starting with the year you reach  your "milestone age":

  • Age 73: If you were born between 1951 and 1959.

  • Age 75: If you were born in 1960 or later.

• The retirement exception: If you are still employed and own 5% or less of the company, you can often delay RMDs from your current workplace plan until the year you actually retire. (Note: Traditional, SEP, and SIMPLE IRA owners must still begin at their milestone age regardless of employment status.)

• Roth account exemption: RMD rules do not apply to Roth IRAs or designated Roth accounts (like a Roth 401(k)) while the original account owner is alive. However, beneficiaries who inherit these accounts are generally subject to RMD rules.

When is the deadline for RMDs?

December 31 is the annual deadline for most account owners. However, you may delay your very first RMD until April 1 of the year following the year you reach your milestone age.

If you delay your first RMD to April 1, you must still take your second RMD by December 31 of that same year, which could result in a "double tax" burden for that calendar year.

How do RMDs work?

• Calculation: Your RMD is determined by dividing your account balance (as of December 31 of the previous year) by an IRS "life expectancy factor."

• Taxes: Most RMDs are treated as taxable income, except for the portion representing "basis" (money that was already taxed).

• Responsibility: You are ultimately responsible for the timing and accuracy of your RMDs. You are always allowed to withdraw more than the minimum, but never less.

Why do RMDs matter? 

Missing an RMD deadline is costly. If you fail to withdraw the full required amount by the deadline, the IRS imposes an excise tax (penalty):

• Standard penalty: 25% of the amount not withdrawn.

Reduced penalty: The tax may be reduced to 10% if the missed RMD is corrected within a specific two-year "correction window."