Understand required minimum distributions (RMDs), including when they begin, how they’re taxed, and what to consider when planning retirement withdrawals.
Taxation of required minimum distributions
Required minimum distributions (RMDs) are mandatory withdrawals from certain retirement accounts and are subject to IRS distribution and tax rules.
- Required minimum distributions (RMDs) generally begin at age 75 for owners of many tax-advantaged retirement accounts.
- RMD withdrawals from Traditional IRAs and employer-sponsored retirement accounts are generally treated as ordinary income for federal tax purposes.
- RMD tax rules and withdrawal requirements can vary based on account type and whether the retirement account is owned or inherited
What's a required minimum distribution?
The IRS allows you to deduct contributions to and defer taxes in certain kinds of accounts—employer-sponsored accounts and traditional IRAs—in an effort to encourage people to save for retirement.
But you can't continue deferring these taxes forever. When you reach age 73 (age 70½ if you attained age 70½ before 2020), you'll be required to withdraw at least a certain amount (called your "required minimum distribution," or RMD) from your accounts every year and pay income taxes on these withdrawals.
Anyone who inherits an IRA may also be required to take RMDs. In general, nonspouse beneficiaries that inherit an IRA from someone that passed away in 2020 or later may be required to withdraw the entire account balance within 10 years. Spousal beneficiaries and certain eligible nonspouse beneficiaries may be permitted to take RMDs over their life expectancy.
GOOD TO KNOW!
Roth IRAs aren't subject to RMD rules. This means that although you had to pay taxes on your contributions when you made them, any earnings can grow tax-free for as long as you live (if you meet the requirements when you withdraw them). Inherited Roth IRAs are also not subject to RMD rules, although they are subject to the 10-year distribution rule.
What's the deadline—and what if I miss it?
For most people, the annual deadline for taking an RMD is December 31. But if it's your first RMD, you can wait until April 1 of the year following the year you reach age 73*.
Just keep in mind that deferring your first RMD means you'll have to take 2 RMDs that year (the first by April 1 and the second by December 31).
If you don't take your RMD by the deadline or if you take less than you're supposed to, you could be subject to an IRS penalty on the shortfall.
How is my RMD calculated?
Your RMD is determined by dividing your prior year-end retirement account balance by your life expectancy factor (published by the IRS).
Many companies, including Vanguard, will calculate your RMD for you. You can also use our tool to estimate your RMD.
If you have multiple accounts
You'll have to calculate your RMD for each IRA and employer-sponsored plan separately.
When you take RMDs from your IRAs, you can withdraw them from any account you choose.
For example, if you have 2 IRAs and 1 has an RMD of $1,000 while the other has an RMD of $2,000, you can take the entire $3,000 from 1 of your IRAs or you can take a certain amount from each—it's up to you.
Employer plans work differently. You have to take each RMD amount from the specific account it was calculated for.
How are RMDs taxed?
If all your IRA contributions were tax-deductible when you made them, the full amount of the RMD will be treated as ordinary income for the year in which you take it.
If you also made nondeductible contributions to your IRAs, some of the amount won't be subject to income taxes. You can use IRS Form 8606 to calculate and report the amount that's not taxable.
Can I donate my RMD to charity and avoid the taxes?
Yes. A qualified charitable distribution (QCD) is not subject to ordinary federal income taxes – the amount is simply excluded from your taxable income. In general, QCDs must be reduced by deductible IRA contributions made for the year you reach age 70½ or later. If you've made deductible IRA contributions for the year you turn 70½ or later, consult a qualified tax advisor prior to taking a QCD to determine the amount by which your QCD must be reduced.
Making QCDs can be a great strategy for anyone who's charitably minded and doesn't need his or her full RMD. In many cases, it's more advantageous than taking the withdrawal and then donating it, because cash donations have deductibility limits.
