How to Calculate Your Required Minimum Distribution & Answers to Common Questions

If you own a retirement account, chances are you’ve already encountered the term “required minimum distribution” or RMD. However, familiarity with the basics doesn’t always make the details easier; understanding how to calculate your RMD and navigate IRS rules regarding them can still be difficult.

Key Takeaways

• RMDs are the minimum amount you must withdraw from your retirement account once you attain a certain age (typically 73 or 75, depending on your birth year).
• RMDs typically apply to most retirement accounts, including traditional IRAs and 401(k)s.
• Your RMD is determined based on your age, account balance, and life expectancy factor from IRS tables.
• If you miss your RMD, it could trigger a 25% penalty, but relief may be available.

JNBA helps clients craft financial strategies tailored to their retirement goals. Learn more about who we are and our approach.

What is an RMD?

An RMD is the minimum amount you must withdraw annually from your tax-deferred retirement accounts once you attain the IRS-mandated RMD age. The age is currently 73; however, it is rising to 75 in 2033 for those born in 1960 or later.

The IRS requires these withdrawals because contributions and investment growth in certain retirement accounts receive tax benefits, like tax deductions and deferred growth. RMDs ensure that money is eventually taxed.

While many retirement savings accounts are subject to RMDs, Roth accounts are exempt during the original owner’s lifetime. If you hold multiple accounts, each is typically subject to its own RMD calculation, though how you meet that obligation varies depending on the account type.

How to Calculate Your Required Minimum Distribution

Calculating your RMD requires two key figures:

• Your account balance as of December 31 of the previous year
• Your applicable life expectancy factor, published in the IRS Uniform Lifetime Table

The RMD formula is:

RMD = Previous December 31 Account Balance ÷ Applicable IRS Life Expectancy Factor 

In other words, simply divide your plan’s account balance on December 31 of the previous year by your life expectancy factor as determined by the IRS.

The life expectancy factor corresponds to your age in the current year and decreases slightly every year, which increases the percentage of your balance you must withdraw over time.

For example, if your December 31 account balance was $1,000,000 and your applicable life expectancy factor was 16.0, your calculation would be:

$1,000,000 ÷ 16.0 = $62,500

If you hold multiple retirement accounts, you will need to calculate each one separately. You can often combine the total amount and withdraw it from a single account. It’s important to keep in mind that different retirement accounts may follow different rules – inherited IRAs and certain spousal beneficiary situations use different RMD rules and tables, and company plans like 401(k) and 403(b) allow for a “still working” provision that may allow you to delay your RMD. Continue reading below to learn more!   

Spouses can affect RMD calculations. If your spouse is more than 10 years younger than you and is your sole beneficiary, a different IRS life expectancy table may apply. Our retirement planning professionals can help you evaluate how the applicable RMD rules may affect your broader financial plan and coordinate with your tax professional.

RMD Rules & Considerations to Remember

Once you’re familiar with the RMD calculation, it’s important to understand the rules for minimum required distributions, as this can help you plan your withdrawals and help optimize your tax strategy. Key RMD rules you should keep in mind include:

Age Requirements

When do RMDs start? For most retirees, they start at age 73. Thanks to the Setting Every Community Up for Retirement Enhancement (SECURE 2.0) Act of 2022, that threshold applies if you were born between 1951 and 1959. However, the age will increase again in 2033 to 75 due to changes in the Act.

Because RMD rules have changed a lot in recent years, it is best to consult a financial advisor to confirm the specific RMD age that applies to you before planning your withdrawals.

RMD Deadlines 

You are generally required to take your first RMD by April 1 of the year after you reach age 73. However, you can also choose to take it during the year you turn 73. After that, your RMD deadline is December 31 each year.

If you choose to wait until April 1 to take your first distribution, you will need to take two RMDs that year, one by April 1 and another by December 31. While this allows you to delay taking your first RMD, it could potentially increase your taxable income for the year in which you make two withdrawals and affect your tax liability.

Penalties

If you fail to take your full RMD by the annual deadline, the amount you failed to withdraw may be subject to a 25% excise tax. The tax may be reduced to 10% if you correct the mistake within two years.

The IRS may also waive the excise tax if you can demonstrate that the failure resulted from a genuine error and you are taking steps to rectify it. You generally must file Form 5329 and provide a reasonable explanation when requesting the penalty waiver.

Tax Implications

RMDs are treated as ordinary income because the taxable portion of your distribution is added to your total taxable income for the year, subject to your marginal tax rate. This can have significant implications for high-net-worth individuals.

A higher RMD may increase taxable income and cause a portion of that income to be taxed at a higher marginal rate. It may also affect other tax-planning considerations and increase Medicare Part B and Part D premiums through income-related monthly adjustment amounts. The actual effect depends on the individual’s total income, deductions, filing status, and other circumstances.

Beyond increasing your Medicare premiums, a higher income can also affect taxes on your Social Security benefits. Because of this, it’s important to consider how your RMD fits into your tax strategy when planning for retirement.

Learn more about how an RMD may affect your taxes and about tax-planning considerations that may help you manage the tax impact. JNBA’s financial advisors can incorporate tax considerations into financial planning and coordinate with your tax professional.

Inherited IRA RMDs

Inherited IRAs follow a separate set of rules than your own accounts, which differ depending on your relationship to the original owner and when they passed. 

Most beneficiaries are required to empty the account within 10 years of the owner’s death. In cases when the original owner died after the RMD beginning date, the beneficiary must also take annual RMDs during that 10-year period.

There are exceptions to these rules. A surviving spouse can roll the account into their own IRA and follow the standard RMD rules, or keep it as an inherited IRA. A few other beneficiaries, such as a minor child of the owner or someone who is disabled or chronically ill, may qualify to stretch distributions over their own life expectancy instead.

Because these rules involve several exceptions, beneficiaries should confirm their specific requirements with a financial advisor or tax professional before creating a withdrawal schedule.

Answers to Common Required Minimum Distribution Questions

Which retirement plans require minimum distributions?

RMDs are required from traditional IRAs, SEP IRAs, SIMPLE IRAs, and employee-sponsored retirement plans such as 401(k)s, 403(b)s, and 457(b)s. You generally aren’t required to take RMDs from a Roth IRA or a designated Roth account in a 401(k) or 403(b) while you’re still alive. However, beneficiaries of all IRA and Roth accounts are subject to RMD rules after the owner’s death.

Do RMDs affect Social Security?

While RMDs won’t reduce the amount of Social Security you receive monthly, they can affect how much of it gets taxed. The IRS determines the taxable portion of your benefits based on your combined income, including your adjusted gross income, tax-exempt interest, and one-half of your Social Security benefits. This means a larger RMD could increase the taxable portion of your benefits.

Do RMDs affect Medicare premiums?

RMDs can increase your Medicare Part B and Part D premiums. Medicare uses your modified adjusted gross income (MAGI) from two years prior to determine whether you owe an Income-Related Monthly Adjustment Amount (IRMAA), on top of your regular premium.

Because pre-tax RMDs generally increase modified adjusted gross income, a distribution may contribute to a higher IRMAA bracket and increased Medicare Part B and Part D premiums. The effect depends on the taxpayer’s total income, the applicable IRMAA thresholds, and other individual circumstances. Tax planning before and during the RMD years may help identify available options, but it cannot ensure that higher premiums will be avoided.

Can I take RMDs from multiple retirement accounts?

Yes, but the rules depend on the type of accounts you own. You must calculate your RMD separately for each IRA you own, but you can add those amounts and withdraw the total from a single IRA if you prefer.

Employer-sponsored plans work differently. If you have multiple 401(k)s or 403(b)s, you must calculate and withdraw the RMD from each plan separately.

Can I postpone RMDs if I’m still working?

If you’re still working past the enforced RMD age, and you own less than 5% of the company sponsoring your 401(k), you may qualify for the “still-working exception”. This allows you to delay RMDs from that specific plan until you actually retire.

However, it’s important to know that this exception does not extend to IRAs and will not apply if you own 5% or more of the company. Additionally, this only applies to your current employer’s plan; 401(k)s from past employers are still subject to RMDs. Since plans vary, it is best to check with your administrator to confirm what applies to you.

Is it better to take RMDs monthly or annually?

The IRS doesn’t dictate how often you should take your RMD. You have the flexibility to take it when you want, as long as you withdraw the full required amount by the applicable annual deadline. You could take the distribution annually or spread it across monthly payments.

The right approach depends on your cash-flow needs, tax-planning strategy, investment allocation, distribution method, and financial preferences. Monthly withdrawals may provide predictable cash flow and may reduce the risk of missing the deadline. An annual withdrawal may leave assets invested longer, but it also exposes those assets to market gains or losses before distribution and may create different withholding or cash-flow considerations. Neither approach is inherently better for every investor.

Connect with the Fiduciary Advisors at JNBA for RMD & Financial Planning Support

Understanding how to calculate your RMD and the IRS rules that govern RMDs is an essential part of retirement planning. However, what matters most is applying these rules to your broader financial strategy. One that accounts for your tax bracket, income sources, Medicare premiums, Social Security benefits, and long-term objectives.

This is where JNBA can help. As a fee-only fiduciary financial advisor, JNBA provides advice designed to address each client’s circumstances. We can help clients evaluate RMD requirements as part of a comprehensive wealth management plan that considers their goals, tax circumstances, income needs, Medicare premiums, Social Security benefits, and other relevant factors. Services and recommendations vary based on each client’s circumstances.

If you would like help evaluating how RMD requirements fit within your broader retirement plan, contact us to discuss your circumstances with one of our experienced advisers.