Eight important things you should know about RMDs

Generally, beginning at age 73, retirement account holders are required to take required minimum distributions RMDs from their tax-deferred retirement accounts. These include Traditional, Rollover, SEP, and SIMPLE individual retirement accounts (IRAs) and employer-sponsored retirement plans. You must pay federal, and sometimes state, income taxes on the taxable amounts of these distributions.

RMDs aren’t optional. If you don’t take your RMD, or take out too little, you may face an IRS penalty tax of 25% of the amount not distributed.¹

Below are responses to eight commonly asked questions about RMDs:

For IRAs, you must take your first RMD by April 1 of the year after you turn age 73, regardless of whether you are retired.

This is referred to as your required beginning date (RBD). Your second RMD must be taken by December 31 of that same year. And each year thereafter, you must take your RMD by December 31.

The distribution can be taken in a lump sum or spread throughout the year as long as the RMD amount is distributed by the due date. Many IRA holders who spend their RMDs prefer to take monthly distributions.

These distributions are generally included in your taxable income. For this reason, many IRA holders choose to take their first distribution by December 31 of the year they turn age 73.

The most commonly affected accounts that require RMDs include:

You need to calculate your RMD each year because it is based on your current age and account balance at the prior year-end.

The RMD for a year is determined by dividing the previous year-end’s fair market value (on December 31) by the applicable distribution period (from the appropriate IRS life expectancy table).

For IRAs, the account owner is responsible for calculating and taking RMDs. To help with this, you can use IRS Publication 590-B and reference Appendix A: Worksheet for Determining RMDs. Many financial institutions can help you with this process—or have tools to help. (Also, see “Simplify your RMDs”.)

The employer is responsible for determining the RMD amount from plans (e.g., 401(k)s) and distributing the RMD.

If you have multiple IRAs, you must calculate the appropriate RMD for each IRA. However, the total RMD amount can be taken from any one or more IRAs. If you have three IRAs, for example, you can take the entire RMD amount from just one IRA.

The 403(b) plan rules mirror IRA rules in that the total distribution from multiple 403(b) plans can be taken from one or more of the 403(b) accounts.

It’s different with 401(k) accounts. If you have multiple 401(k) accounts from prior jobs, each plan will calculate the RMD and send a distribution.

Before turning age 73 is a great time to review your retirement account structure and consolidate the number of accounts when possible.

Many investors may choose to take their RMD throughout the year on a monthly basis, for example, if using the funds to help pay expenses. Some may prefer taking their RMD all at once, early in the year, to ensure that it’s taken care of, while others prefer to wait until later in the year to give their investments more time to grow tax-deferred. There is no right or wrong answer. The choice is a personal one and depends on what may be best for your household.

If you are taking RMDs and collecting Social Security benefits, the RMDs will not impact the amount of your benefits—but they could impact how much of your Social Security benefit is taxable. The amount your Social Security is taxed depends on your annual income. RMDs may increase your taxable income. Consider consulting with a financial professional if this is a concern for you.

The rules surrounding Inherited IRA RMDs are a bit complex and vary depending on the beneficiary’s relationship to the original account owner and whether the account owner was taking RMDs.

The SECURE Act of 2019 changed Inherited IRA RMD rules for many non-spouse beneficiaries, subjecting them to a 10-year rule.

If you have inherited an IRA, it’s important to consult your financial advisor and/or a tax professional who can tell you which RMD rules apply to you and then help you make the smartest decision based on your situation.

Once the RMD is distributed, you don’t have to spend it if you don’t need to, but it cannot remain in the tax-deferred retirement account. If you don’t wish to spend the distribution, you can: