What's an RMD and how is it calculated?

Whether you’re preparing for retirement or already enjoying it, one thing remains true: You want to make the most of your income and protect it from unnecessary penalties. Sounds easier said than done, especially when required minimum distribution (RMD) rules change from time to time, and both RMDs and withdrawal strategies have tax consequences. We're here to help you:

• Understand how RMDs work.
• Avoid tax penalties.
• Plan ahead for RMDs in your pre-RMD years.
• Understand inherited IRAs and their tax implications.

What if I don’t need the RMD assets?

RMDs are designed to spread your retirement savings and related taxes over your lifetime. If you don’t depend on the money to satisfy your spending needs, you may want to consider:

• Reinvesting your distributions in a taxable account to take advantage of continued growth. You can then add beneficiaries to that account without passing along future RMDs to them.
• Gifting up to $100,000 annually to a qualified charity. Generally, qualified charitable distributions, or QCDs, aren’t subject to ordinary federal income taxes. As a result, they’re excluded from your taxable income.  
• Beginning in 2023, a QCD may be taken to fund a Charitable Remainder UniTrust, Charitable Remainder Annuity Trust, or Charitable Gift Annuity up to a maximum one-time amount of $50,000.

How can I be sure to avoid penalty tax?

Depending on the amount you’re required to take, the cost of missing an RMD can be significant. To avoid a penalty, take the full amount each year. For RMD amounts that were required to be withdrawn for the 2022 tax year, you may be subject to a 50% tax penalty. For RMD amounts required to be taken for tax years starting in 2023 forward, that tax penalty will be reduced to 25% with an opportunity to further reduce the penalty to 10% if the failure is corrected in a timely fashion.  Speak to your tax adviser for more information.

Does Vanguard offer a service that can help with my RMD calculations and distributions?

Once you reach RMD age, we’ll automatically calculate your annual RMD amount for any eligible IRAs** and Individual 401(k)s held at Vanguard. You’ll receive an annual statement in late January and can also find your calculation here. For eligibile IRAs, you can also enroll in our free and convenient RMD Service, which allows you to set up your RMDs to be automatically distributed each year. It’s a great way to make sure you never miss a distribution or find yourself subject to the penalty.

How are RMDs calculated?

Calculating RMD amounts can get a bit complicated, which is why we recommend leaving it to the experts. But here’s a high-level overview of how it works.

RMD amounts are determined by looking at the following factors:

• Your age as of December 31 of the current year and your corresponding life expectancy factor according to the IRS Uniform Lifetime Table or Joint Life and Last Survivor Table if your spouse is your sole beneficiary and more than 10 years younger than you.
• Your retirement account balance as of December 31 of the previous year, which should be adjusted to include any outstanding rollovers or asset transfers that weren’t in the account at year-end. Note: In this situation, you’ll need to call Vanguard to confirm the value of the outstanding rollover assets that need to be included in your December 31 balance.

For example, if the life expectancy factor for your age is 22.9, and the value of your IRA is $800,000, your RMD would be $34,934.50 ($800,000/22.9).