What Are Required Minimum Distributions?

How Required Minimum Distributions Work

If you're making tax-deductible contributions to a retirement account, you'll eventually have to take RMDs. The same goes for retirement accounts funded with pretax dollars, such as a 401(k). Since your contributions to a tax-deferred retirement account are taken straight from your paycheck before you pay taxes on that money, RMDs ensure those taxes get paid when you hit retirement age.

RMDs apply to the following accounts:

• 401(k)s
• 403(b)s
• 457(b)s
• Traditional IRAs
• SEP IRAs
• SARSEP IRAs
• SIMPLE IRAs

Accounts Without RMDs

Not all retirement accounts are subject to RMDs, and knowing these rules ahead of time can help you structure your larger retirement investment strategy.

First, Roth IRAs are not subject to RMDs. These retirement accounts are funded with after-tax dollars. That means you can make withdrawals whenever you like, penalty- and tax-free, as long as you're at least 59½ and you've had the account for at least five years. Once in retirement, if you don't need the income, you don't necessarily have to withdraw any funds on a yearly basis.

That said, there are different rules for beneficiaries who inherit a Roth IRA. Folks in this camp must take RMDs after the original account holder's death, though younger beneficiaries are able to take smaller distributions over a longer period of time. That gives their funds more time to benefit from tax-free growth.

As of the 2024 tax year, Roth 401(k)s are also no longer subject to RMDs during the account holder's lifetime. RMDs still apply to beneficiaries of inherited Roth 401(k)s.

Calculating Your RMD Amount

The IRS has a specific formula for calculating the amount of required minimum distributions. For each account, you divide the prior December 31 balance by an IRS life expectancy factor. There are three different charts to choose from, depending on your situation.

• Single Life Expectancy Table I: You're the beneficiary of an inherited IRA.
• The Joint and Last Survivor Table II: Your spouse is the sole beneficiary of the account and they're more than 10 years younger than you.
• Uniform Lifetime Table III: Your spouse is not your sole beneficiary or they're not more than 10 years younger than you.

Let's say the prior year-end account balance for your traditional IRA was $200,000. You just turned 73 and your spouse, who is 68, is the sole beneficiary of your account. In this case, you'd use the Uniform Lifetime Table III, which shows your life expectancy factor as 26.5. Your required minimum distribution would be $7,547 ($200,000 / 26.5).

How Are RMDs Taxed?

Required minimum distributions are taxed at your current personal income tax rate. This amount is determined by your income and tax filing status. Below are the 2024 federal tax brackets (for taxes due in April 2025).

Source: IRS

Learn more: How Do Tax Brackets Work?

RMD Tax Example

Let's say you're married, filing jointly and your combined income with your spouse is between $94,301 and $201,050. That puts your tax bracket at 22%. Returning to the example from earlier, let's assume an RMD of $7,547. Your tax liability on that distribution would be $1,660 ($7,547 x 0.22).

Again, if you're taking distributions from a Roth IRA, you won't be taxed at all.

What Happens if You Don't Take Your RMD?

The penalty for not taking your RMD on time or withdrawing too little is pretty steep: The amount not withdrawn will be taxed at 25%. You'll also be expected to file IRS Form 5329 with your federal tax return for that year.

If you miss your required minimum distribution, talk to your financial or tax advisor, if you have one, to understand possible consequences. They may recommend taking the necessary distribution right away to mitigate the consequences. If you correct the missed distribution within a year of the missed deadline, you may be able to lower the 25% missed distribution penalty to 10%.

Also, you may be able to waive the penalty if you can establish that the mistake was due to a reasonable error and that you're taking steps to remedy the situation. In this case, you'll file the same tax form along with a letter of explanation.

Learn more: What Happens if I Don't Take Required Minimum Distributions?

The Bottom Line

RMDs are a way for the IRS to prevent account holders from dragging their feet when it comes to paying taxes. If you're already withdrawing from your retirement accounts to pay for living expenses prior to reaching age 73, then RMDs may not have a major impact on your withdrawal rate. But it's important to be sure you're taking out at least the minimum, while also avoiding depleting your savings too rapidly.

Staying on the right side of the IRS is always recommended. This includes taking your full RMD on time every year. Failing to do so could result in a penalty that takes a significant bite out of your nest egg. A financial advisor can help you fit tax planning into your retirement plan, or find your RMD amount if you're currently in retirement.