RMDs

RMDs, or required minimum distributions, are the minimum withdrawals that must be taken each year from certain tax-deferred retirement accounts once the account holder reaches a specified age. The purpose is to ensure that savings are withdrawn and taxed during the owner's lifetime. RMDs generally apply to traditional IRAs and account-based employer plans such as 401(k)s and 403(b)s. Roth IRAs do not require withdrawals during the original owner's lifetime, though beneficiaries may face RMDs after inheritance.

Starting age and timing: The age at which RMDs must begin has been changed by law. As of 2023, individuals must start taking RMDs by age 73; the first RMD is usually due by April 1 of the year after reaching the required age, and subsequent RMDs are due by December 31 each year. Some plans permit deferral of RMDs for individuals who are still working and not 5% owners, for certain workplace accounts.

Calculation: The RMD amount is calculated by dividing the account balance on December 31 of the previous year by an IRS life expectancy factor. For multiple accounts, the method can be calculated separately for each account or pooled. If the spouse is the sole beneficiary, some individuals use a different joint-life factor to reduce the distribution.

Penalties and planning: Failing to withdraw the full RMD triggers a penalty tax on the shortfall, typically 50 percent, though relief or correction may apply in certain cases. RMDs are generally taxable as ordinary income; Roth withdrawals are tax-free in many circumstances, and qualified charitable distributions can count toward the RMD while reducing taxable income.

Other considerations: If an account is inherited, a 10-year rule often requires full depletion within 10 years for most non-spouse beneficiaries, with exceptions for certain eligible beneficiaries. Planning strategies include timing withdrawals, using QCDs, and coordinating with tax planning or estate goals.