Calculating the required minimum distribution (RMD) from your retirement funds can seem complicated. But we’ve broken down the calculations for you so that you can easily calculate yours and avoid any tax penalties.
How to calculate your RMD
Calculate your RMD in four steps:
- Using the IRS Uniform Lifetime Table below, locate the distribution period by your age.
- Determine your IRA or other retirement account balance as of December 31 of the year before.
- Divide your account balance by your distribution period.
- Repeat this calculation for each account that requires an RMD.
IRS Uniform Lifetime Table
Exceptions to calculations
The base calculation for your RMD is the following:
Account balance Distribution period = RMD
If you have one IRA or qualifying retirement account
Divide your account balance by your distribution. For example, if your account balance as of December 31, 2020, is $20,000, your age as of 2021 is 75 and your distribution period is 22.9, your RMD is $873.36.
If you have multiple retirement accounts that require RMDs
You must calculate the RMD for each account by dividing your account balance by your distribution. But you don’t have to withdraw the amounts from each account to satisfy your annual RMD. You can choose to combine the RMD amounts and withdraw from only one account. For example:
- IRA #1 account balance: $20,000 / 22.9 = 873.36
- 401(k) account balance: $100,000 / 22.9 = 4,366.81
- IRA #2 account balance: $40,000 / 22.9 = 1,746.72
Your total RMD for the year is $6,986.89. You can choose to break up your withdrawal across multiple accounts or remove the entire amount from one account.
If your spouse is your only beneficiary and is at least 10 years younger than you
Use Table II in Appendix B of the IRS Joint Life and Last Survivor Expectancy table and choose the distribution period at the intersection of your age and your spouse’s age. For example:
- Account balance as of December 31, 2020 = $20,000
- Your age as of 2021 = 75
- Your spouse’s age as of 2021 = 63
- Distribution period = 24.3
If you have multiple accounts, you would use the same intersecting distribution period to calculate each account and then combine for the total amount you must withdraw for the year.
What if my beneficiary isn’t my spouse?
You have 10 years to take your money out if your beneficiary isn’t your spouse, according to Rubina Hossain, Certified Financial Planner at Annuity.org. “This is one of the biggest changes in the Secure Act, there is no longer the ability to “stretch” beneficiary IRAs over one’s lifetime for certain designated non-spouse beneficiaries. But if the beneficiary isn’t 10 years younger than the original deceased account owner, then they’re able to utilize the “stretch” IRA, which is to take the RMD amount over to the beneficiary’s lifetime or the five year rule,” explains Hossain.
What RMD rules apply if I inherited an IRA?
Prior to the passage of the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, you could stretch out inherited IRA distributions over your lifetime. But the new rules require non-spouse inheritors to take distributions that drain the account within 10 years of the account holder’s death. Basically, you now have 10 years to pay the taxes on any inherited tax-advantaged retirement accounts.
What is the required minimum distribution?
RMD is the minimum amount you’re required to withdraw from tax-advantaged retirement accounts each year until you pass away or the retirement fund is depleted. The RMD applied to everyone starting at age 70 and a half years old, but the SECURE Act increased the age to 72, for anyone who doesn’t turn 70 and a half until January 1, 2020 or after.
Does my plan require an RMD?
Most tax-advantaged retirement plans require an RMD, but there are a few nuances, depending on when you retire and how much of your employer’s company you own.
|Traditional IRA||Yes||70 and a half or 72|
|SEP IRA||Yes||70 and a half or 72|
|Simple IRA||Yes||70 and a half or 72|
|401(k)||Yes||70 and a half or 72 or the first year after retirement, whichever is later|
|403(b)||Yes||70 and a half or 72|
|457(b)||Yes||70 and a half or 72|
|Profit-sharing plan||Yes||70 and a half or 72|
|Employer contribution plan, and you own 5% or more of the company||Yes||70 and a half or 72, regardless of when you retire|
|Roth 401(k)||Yes||70 and a half or 72|
What’s the RMD deadline?
You must take your first annual RMD by April 1 of the year after you qualify. For example, if you turn 72 on December 15, 2020, you must take your RMD for the year by April 1, 2021. Every year after, you must take your entire RMD by December 31.
If you don’t take any distributions, or if the distributions don’t meet your calculated requirement, you’ll be subject to an excise tax on the amount not distributed.
What happens if I miss my RMD?
If you don’t take a distribution for the year or take less than the RMD amount, you’re taxed 50% of the undistributed RMD. For example, if you’re required to take out $2,000 for the year, but you only take out $1,000, you’re subject to a 50% tax on the remaining $1,000.
RMD changes due to the coronavirus relief bill
Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, you’ll no longer get taxed on 50% of your undistributed RMD if you fail to collect on time. This is only for RMDs you were supposed to collect in 2020.
Read our guide to the CARES Act and other changes that affect your retirement accounts.
How do I take my RMD?
After your first year, you can choose to withdraw your RMD as one large payment, or set up smaller month-to-month automatic payments. You can receive your RMD payment in one of the following ways:
- Check. Get a check in the mail.
- ACH Transfer. Get your funds transferred directly into your bank account.
- Automatically reinvest. Roll the funds into a pre-taxed investment account.
You can also elect to have your taxes withheld from the withdrawals before they’re sent to you. If you choose not to, make sure that the RMD tax amount won’t result in an IRS underpayment penalty.
How can I avoid or reduce my RMD?
You can’t avoid or reduce the amount of your RMD. But if you don’t need the money for your retirement living expenses, there are ways to reduce the taxes you pay on your withdrawals.
- Reinvest the money. You can’t reinvest into traditional tax-advantaged retirement accounts, but you can invest in taxable brokerage accounts, such as ETFs, municipal bonds or long-term stocks that pay qualified dividends.
- Roth IRA. Roll your traditional IRA funds into a Roth IRA and pay taxes on the money as you convert it. If you do this slowly over the span of a few years, you can minimize the impact it will have on your annual taxes, and any money you withdraw from your Roth IRA in the future is tax-free.
- Give to charity. Make a qualified charitable distribution of up to $100,000 annually straight from your IRA to the charity of your choice. Using this method, the distribution doesn’t count as part of your gross income for the year, and doesn’t interfere with the deductions limits on your other charitable giving.
- Gift the money to heirs. Use the money to fund a college savings account or Roth IRA — the money becomes part of your family inheritance.
As long as you don’t turn 70 and a half until 2020, the SECURE Act lets you put off starting your RMDs until age 72. But it’s still a good idea to understand what kind of distribution you’re required to take and plan what to do with the money. To get a better idea of what you can do with your accounts and what your options are, compare retirement savings accounts to find out what will work best for your retirement.