RMDs: What you need to know

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 simplify important details:

• Understanding how RMDs work.
• Avoiding tax penalties.
• Planning ahead for RMDs in your pre-RMD years.
• Inheriting an IRA―and the applicable 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.  

How can I be sure to avoid the 50% 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. Otherwise, you’ll owe the IRS 50% of the shortfall. 

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 distribution amount for any traditional 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. 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 50% 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).