A required minimum distribution, or RMD, is a mandatory withdrawal you must take from your retirement account each year. This amount is based on your age and the balance of your account. If you fail to withdraw the required amount, you may face penalties from the IRS. This guide will discuss how RMDs work and what you need to do to comply with the law.
- What is a Required Minimum Distribution (RMD)?
- How Does Required Minimum Distribution (RMD) Work?
- Retirement Plans Without Required Minimum Distribution Requirements
- Calculating RMDs Annually
- Required Minimum Distributions – RMD Calculator
- Qualified Distributions For Life
- RMD Calculation Table (2023)
- How Are RMDs Taxed?
- How To Offset Required Minimum Distributions With Annuities
- Estate Planning
- Next Steps
- Frequently Asked Questions
- Related Tools
- Request A Quote
What is a Required Minimum Distribution (RMD)?
A required minimum distribution (RMD) is an IRS rule that requires an owner of a qualified retirement plan to begin taking annual distributions starting at age 73 from their IRA or retirement plan. Qualified retirement plans include:
- Traditional IRA
- Simplified Employee Pension IRA (SEP)
- Savings Incentive Match Plans
- 401(k) Plans
- 403(b) Plans
- 457(b) Plans
- Profit-Sharing Plans
- Defined Benefit Pension Plans
- Cash Balance Plans
- Qualified Annuity
How Does Required Minimum Distribution (RMD) Work?
RMDs were created by the Internal Revenue Service (IRS) to prevent taxpayers from using their retirement accounts as tax shelters. Instead, the IRS ensures taxpayers pay taxes on their retirement savings over time by requiring withdrawals.
The amount of your RMD is calculated using a formula that considers your age and your retirement account balance. The IRS provides tables that can be used to calculate your RMD.
You must take RMDs from your retirement account no later than April following the year you turn 73. So, for example, if you turned 73 in 2022, you would need to take your first RMD by April 2023.
You will need to take your RMD each year after that. The deadline for taking your RMD is December 31st of each year.
Retirement Plans Without Required Minimum Distribution Requirements
- Roth IRA
- Nonqualified Retirement Plan
- Nonqualified Annuity
- Checking and Savings Account
- Stocks
- Bonds
- Mutual Funds
Calculating RMDs Annually
You do not have a Required Minimum Distribution calculator. Minimum distributions are calculated by dividing the qualified retirement account balance on December 31 by the life expectancy factor (Distribution Period) below.
Total Account Balance ÷ Life Expectancy Factor = RMD Amount
Example: $100,000.00 (Account Balance) ÷ 23.8 (Age 74) = 4,201.68 (RMD Amount)
Multiple Qualified Retirement Plans
If you have more than one retirement account, you must take an RMD from each account. You can take your RMDs from one or more accounts, but the total amount you withdraw must be at least the amount of your RMD.
For example, if your RMD is $1,000 and you have two retirement accounts with balances of $50,000 and $100,000, you could take an RMD of $500 from each account. Or, you could take an RMD of $1,000 from one account and withdraw nothing from the other.
You cannot use your RMDs to meet the minimum distribution requirements for other accounts, such as IRAs or 401(k)s.
RMD Deadline
- April 1st of the following year for retirees just turning age 73
- December 31 for all subsequent years
Required Minimum Distributions – RMD Calculator
Use our free online RMD calculator to estimate withdrawals from your qualified retirement savings accounts.
Qualified Distributions For Life
Instead of withdrawing 401(k) and IRA distributions like a savings account, utilize an annuity with a guaranteed lifetime withdrawal benefit to automate RMDs.
Annuities are RMD-friendly, and withdrawals are guaranteed for the rest of your life with zero decreases in your income.
Note: You can purchase an annuity (with no tax penalties) with your 401(k), IRAs, retirement accounts, investments, and cash.
RMD Calculation Table (2023)
| Age | Distribution Period |
|---|---|
| 72 | 27.4 |
| 73 | 26.5 |
| 74 | 25.5 |
| 75 | 24.6 |
| 76 | 23.7 |
| 77 | 22.9 |
| 78 | 22.0 |
| 79 | 21.1 |
| 80 | 20.2 |
| 81 | 19.4 |
| 82 | 18.5 |
| 83 | 17.7 |
| 84 | 16.8 |
| 85 | 16.0 |
| 86 | 15.2 |
| 87 | 14.4 |
| 88 | 13.7 |
| 89 | 12.9 |
| 90 | 12.2 |
| 91 | 11.5 |
| 92 | 10.8 |
| 93 | 10.1 |
| 94 | 9.5 |
| 95 | 8.9 |
| 96 | 8.4 |
| 97 | 7.8 |
| 98 | 7.3 |
| 99 | 6.8 |
| 100 | 6.4 |
How Are RMDs Taxed?
Required minimum distributions are taxed as ordinary income unless the funds withdrawn were previously taxed. This means RMDs are subject to Federal Income Tax and State and Local tax. Since Roth IRAs do not require required minimum distributions, there is no taxation.
Reducing Taxes
In some cases, an RMD could put a retiree in a higher tax bracket and affect Social Security and Medicare taxes. However, leveraging a qualified charitable distribution (QCD) could reduce these effects since QCDs can be excluded from taxable income.
What is a Qualified Charitable Distribution (QCD)?
A qualified charitable donation is a transfer from an IRA to a qualified charity. A QCD can be counted toward satisfying an RMD for the year. QCDs can be funded by:
- Traditional IRA
- Inherited Traditional IRA
- Inherited Roth IRA
- Inactive SEP IRA
- SIMPLE IRA
Qualified Charitable Distribution (QCD) Rules
- Age 73 or older as of the date of the distribution
- $100,000 maximum amount per spouse ($200,000 total)
- Only public charities are eligible
- Donor-advised funds, private foundations, and supporting organizations are not eligible.
- The donor can not receive a benefit in return—no Charitable Gift Annuities.
Inheriting an RMD
A beneficiary who inherits a qualified retirement account must distribute those assets within ten years of the deceased’s death, with no required RMD during those ten years. Those beneficiaries excluded from the 10-year rule are:
- Surviving Spouse
- Minor Children (until adulthood)
- Disabled or chronically ill beneficiaries
- Beneficiaries are less than ten years younger than the deceased.
These exceptions are allowed to stretch RMD payments over their life expectancy.
How To Offset Required Minimum Distributions With Annuities
Most annuities are “RMD-Friendly.” If the RMD amount for the individual annuity is larger than the allotted penalty-free withdrawal, the annuity company will waive surrender charges to accommodate the RMD amount.
In some cases, annuities can help offset the RMD withdrawal, preserving the asset with a premium bonus (up to 20%) or an enhanced death benefit.
Do Annuity Payments Count Towards RMDs?
Yes, annuity payments, withdrawals, and lifetime income from a qualified annuity will count toward the year’s required minimum distribution amount.
Estate Planning
For those retirees who do not need income from an RMD, leveraging annuities and life insurance could maximize an estate plan for beneficiaries. One could essentially spend the RMD and preserve the entire (or close to) original investment for heirs.
- Transferring RMDs into annuities with enhanced death benefits.
- Example: One specific annuity can provide beneficiaries with 130% of the annuity’s value when the owner dies. This 30% bonus will offset most, if not all, of the taxes owed.
- Paying life insurance premiums with RMDs. (Shop life insurance quotes)
Next Steps
The required minimum distribution (RMD) rule created by the Internal Revenue Service (IRS) prevents taxpayers from using their retirement accounts as a tax shelter. Instead, the IRS ensures taxpayers pay taxes on their retirement savings over time by requiring withdrawals. If you have questions about RMDs or want to discuss your specific situation, don’t hesitate to contact our team for a quote. We are happy to help!
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Frequently Asked Questions
Is RMD required for annuities?
No, RMD is not required for annuities. However, if you have an annuity funded with pre-tax money, such as a traditional IRA, you will be required to take RMD when you reach the age of 73.
Does RMD increase with age?
Yes, the number of your RMD increases as you age. The IRS wants to ensure you do not defer taxes on your retirement savings for too long.
What if I forget to take my RMD?
If you fail to take your RMD, you will be subject to a penalty equal to 50% of the amount you should have withdrawn. So, for example, if your RMD is $1,000 and you fail to take it, you will owe a penalty of $500.
You may be able to avoid the penalty if you can show that the failure was due to reasonable cause. Examples of reasonable causes include illness, death, or financial hardship. You will need to provide documentation to the IRS to avoid the penalty.
What is the IRS life expectancy table?
The IRS life expectancy table is used to calculate your RMD. The table is based on your age and your retirement account balance.
What if I have more than one retirement account?
If you have more than one retirement account, you must take an RMD from each account. You can take your RMDs from one or more accounts, but the total amount you withdraw must be at least the amount of your RMD.
For example, if your RMD is $1,000 and you have two retirement accounts with balances of $50,000 and $100,000, you could take an RMD of $500 from each account. Or, you could take an RMD of $1,000 from one account and withdraw nothing from the other.
You cannot use your RMDs to meet the minimum distribution requirements for other accounts, such as IRAs or 401(k)s.
What are the tax implications of taking an RMD?
The amount of your RMD is considered taxable income. This means you will owe taxes on the money you withdraw from your retirement account. The tax rate that you will owe depends on your marginal tax bracket. For example, if you are in the 25% tax bracket, you will owe 25% in taxes on the money you withdraw.
Does a Roth conversion count as an RMD?
No, a Roth conversion does not count as an RMD. However, you may owe taxes on the conversion if you are not yet 73 years old.