A penny saved is a penny earned. If you save all your life for retirement, it stands to reason that eventually you’ll use that money, but did you know there are rules around when and how much money you need to take out of your retirement accounts? At some point before the first April 1st after you turn 73, you have to at least put those funds in your own personal savings, thanks to laws mandating distributions.

Known as Required Minimum Distributions, or RMDs, these withdrawals will make tax time a little costlier once you hit your 70s. By understanding the requirements, you can prepare in advance.

What Are RMDs (Required Minimum Distributions)?

Certain retirement accounts – most commonly 401(k)s, 403(b)s and IRAs – let you set money aside tax free for retirement. But these accounts aren’t designed to let you skip out on paying taxes forever. At some point, Uncle Sam is going to come calling, at which point you’ll have to start taking out some of those funds and claiming them at tax time. Required Minimum Distributions apply to traditional IRAs, 401(k)s, and 403(b)s. Roth accounts don’t have RMD rules because you’ve already paid taxes on your contributions.

The time to think about your retirement accounts is before the end of each year. Since the passing of the SECURE Act 2.0, the following rules apply to RMDs:

• Starting on January 1, 2023, owners of retirement accounts must start taking RMDs when they turn 73.
• In 2033, the age at which RMDs must start jumps to 75.
• Starting in 2023, the penalty for failing to take an RMD decreased to 25% of the RMD not taken. This is down from 50%.
• The penalty for failing to take an RMD is reduced to 10% for IRA owners if the account owner takes out the RMD previously not taken and submits a corrected tax return.
• Starting in 2024, Roth accounts in employer retirement plans will be exempt from RMD requirements.

You’ll need to withdraw the minimum amount before the first April 1st after you turn 73 to avoid a 25% penalty at tax time. This penalty is in addition to the taxes you’ll have to pay on the amount you should have taken out.

The problem, for many retirement account holders, is that it can be tough to know just how many accounts you have hanging around, waiting to come back to haunt you. You may have inherited an IRA you forgot about at some point, or you might simply have a 401(k) or 403(b) with a long-ago employer that slipped your mind. Whatever the case, you’ll need to track down all those accounts before you reach the IRA, 401(k), and 403(b) withdrawal age to avoid the penalty.

Once you’ve gathered information on all your accounts, set up automatic withdrawals to ensure you never have to pay that penalty. It may be easier to roll your accounts into one, though you should note that you only get one tax-free indirect IRA rollover per year and plan accordingly. Most investment brokerages can work with you to make this process as easy as possible, such as scheduling automatic IRA distributions by bank transfer or a mailed check. You can set your account up to send the payments annually, monthly, or following a schedule you set up.

Inflation? Recession? No worries.

Download our new guide to help safeguard your retirement.

Download Now

How Do You Calculate RMDs?

Calculating the minimum amount you need to take from your accounts is fairly simple. The easiest way is to use the tables provided with each year’s tax forms. Last year’s worksheets are based on the 72-year RMD IRA, 401k, and 403(b) withdrawal ages, but the basic concept is the same.

To calculate how much to withdraw before the end of this year, you’ll need to first know your balance as of December 31st of the previous year. You’ll then consult a table, provided on the worksheet, to get your exact distribution period, which is based on your age. You’ll divide the distribution period number from your balance to get your required minimum distribution for the year.

So if you’re 73 and claiming a distribution on your taxes for last year, you’ll divide your account balance by 25.6. If your balance was $10,000, you would have been required to withdraw at least $390.63 from your taxable retirement fund and claim that amount on your taxes.

Although there are 401(k), IRA, and 403(b) minimum distribution amounts, there are no maximums. You can empty out the entire account once you reach the age of 59½ without penalty. But those withdrawals will be taxed as ordinary income, so plan carefully before taking withdrawals.

When Do You Take Your RMD?

The Setting Every Community Up for Retirement Enhancement Act of 2022, also known as the SECURE Act 2.0, changed the required age of RMD to 73.

The deadline to take your RMD is December 31 each year. You won’t have to start taking distributions until April 1st of the year after you reach the age of 73. For example, if you turned 73 in July of this year, you can:

• Take your first RMD by December 31 of this year
• Delay taking your first RMD until April 1 next year—the first April after you turned 73

If you wait until next year, you will need to take both yur first and second RMD in 2024, which may force you into a higher tax bracket.

Although you have to follow the RMD age requirements, that doesn’t mean you can’t reinvest the funds. You can’t roll them into a tax-deferred retirement account to subvert taxes, but you can put them into another savings account, invest them, or use the money to help pay off interest-bearing expenses like your mortgage or car payment.

What If I’m 73 and Still Working?

If you’re 73 and still working, you might qualify for an exception from taking RMDs from your employer-sponsored retirement plan. You must still take RMDs from IRA accounts (including SIMPLE and SEP IRAs) and other retirement plans in which you are no longer an active participant, regardless of whether you are still working.

In other words, if you still have a 401(k) from a former employer, you will need to make sure you take RMDs from that account. A workaround would be to roll those funds into your current plan, if allowed.

Bottom Line

Prior to turning 72, you should make sure you’ve accounted for every 401(k), 403(b), and IRA in your name. A mandatory withdrawal or distribution will apply whether you know about the account or not. To make the most of the funds you’re required to take out, we recommend meeting with a Certified Financial Planner®, who can come up with a plan that best matches your lifestyle.

Frequently Asked Questions

You asked. We answered.

What are Required Minimum Distributions (RMDs)?

RMDs are the minimum amounts that the IRS requires you to withdraw annually from your retirement accounts, such as traditional IRAs, 401(k)s, and 403(b)s, once you reach a certain age. These rules are designed to ensure that individuals use their retirement savings during their lifetime and pay taxes on those funds.

At what age do I need to start taking RMDs?

As of the latest guidelines, you must start taking RMDs by April 1 following the year you turn 72. This age was updated from 70½ following the passage of the SECURE Act in 2019.

Which retirement accounts are subject to RMDs?

RMDs apply to traditional IRAs, 401(k)s, 403(b)s, and other defined contribution plans. Roth IRAs do not require withdrawals until after the death of the owner, but Roth 401(k) accounts do require RMDs during the owner's lifetime.

How are RMD amounts calculated?

The amount of your RMD is calculated by dividing the account balance as of December 31 of the previous year by a distribution period from the IRS’s Uniform Lifetime Table. Your age and account balance determine the exact amount you must withdraw each year.

Can I withdraw more than the minimum required amount?

Yes, you can always withdraw more than the RMD amount from your retirement account. However, it’s important to remember that any withdrawal will be considered taxable income, so withdrawing more than necessary could increase your tax liability.

Are there any exceptions to the RMD rules?

Yes, there are some exceptions. For example, if you are still working and do not own more than 5% of the business you work for, you might be able to delay RMDs from your current employer’s 401(k) until retirement. Also, the first RMD allows a slight delay until April 1 of the year following the year you turn 72, but subsequent RMDs must be taken by December 31 each year.

What are the downsides of required minimum distribution?

The main downside of being forced to take your RMDs, if you don’t need the money, is that you’ll need to pay taxes on the income from them. In addition, if you have other sources of income, you could get pushed into a higher tax bracket and also need to pay higher Medicare premiums.

What is the 4% rule for RMDs?

The 4% rule is one rule of thumb or guideline for how to spend your savings during retirement. It suggests that you add up all of your investments, and withdraw 4% of the total during your first retirement year. In subsequent years, you adjust the dollar amount to account for inflation. When using the 4% rule, your RMDs should be included in the total calculation of your savings and spending amount.

How do I avoid paying tax on my RMDs?

Since you can get an exception if you continue to work after your RMD age, working past 73 is one way to prevent being taxed on RMDs. Another option is to donate some of your distributions to a qualified charity. Qualified charitable distributions, or QCDs for short, let you transfer money from an IRA to an eligible not-for-profit organization. The distributions that have been transferred to a QCD are not taxable.

Need help making sense of it all?

We're here to help you navigate your retirement journey.

Talk with a Retirable Advisor