Required Minimum Distributions

Whether you're preparing for retirement or already enjoying it, making the most of your nest egg and shielding it from unnecessary penalties is crucial. Navigating required minimum distribution (RMD) rules can seem tricky, especially when they change from time to time. Both RMDs and withdrawal strategies have tax consequences, so it's important to stay informed and plan carefully. We're here to help you understand:

• What RMDs are and what rules surround them—including how they're calculated and taxed.
• What happens if you don't take—or need—your distributions and how to avoid tax penalties.
• Whether you can take your RMD from multiple retirement accounts.
• Additional factors to consider before taking RMDs.

What are RMDs?

Once you turn age 73,¹ you must withdraw a minimum amount—known as your RMD—each year from your tax-deferred retirement savings accounts like traditional IRAs. You may also need to take your RMD from any qualified employer-sponsored plans like 401(k)s.

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 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 the 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 the end of the year. 
  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).

What if I don't take my RMD or don't distribute enough to satisfy the requirement?

Depending on the amount you're required to take, the cost of missing an RMD can be significant—so it's best to take the full amount each year. Updates to the Secure 2.0 Act made in 2023 reduced the tax penalty from 50% to 25%—and possibly 10% if you correct your RMD within 2 years. For RMD amounts that were required to be withdrawn for the 2022 tax year, you may still be subject to a 50% tax penalty. Speak to your tax advisor for more information.

How will my RMDs be taxed and how can I plan for it?

Distributions of contributions and earnings from a traditional IRA are fully taxable as ordinary income. You're eligible to withdraw from a traditional IRA penalty-free if you're 59½. However, if you're taking distributions from an IRA that was partially or fully funded with after-tax contributions, some or all of your RMD may be exempt from taxes. Use IRS Form 8606 to calculate and report the exempt portion. You can withdraw Roth IRA earnings tax- and penalty-free when you turn 59½ if you've also held the account for 5 years.

When you're between the ages of 59½ and 73, you have the flexibility to annually revisit how to minimize your future taxes. For example, if you have a large balance in a tax-deferred account—like a traditional IRA or 401(k)—and could face high RMDs in the future, you may benefit from:

• Withdrawing those assets in the years leading up to your RMD age. While you'll be accelerating some tax liability up front, you'll be decreasing future RMDs thanks to a smaller account balance.

Converting some of your traditional IRA assets into a Roth IRA, which—if you've held the account for at least 5 years—isn't currently subject to RMDs or taxes when you withdraw your assets in retirement. Learn more about the benefits of a Roth conversion to see if it might be a smart move for you.

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 to a qualified charity. You can gift up to $108,000 in 2025 (up from $105,000 in 2024). 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 onetime amount of $53,000.

What else should I consider before taking my RMD?

Several years may have passed since you first named IRA beneficiaries, and your designations may need to be updated due to marriage, divorce, births, or deaths. You can review and update your beneficiary designations for your Vanguard accounts online.

If your sole primary beneficiary is your spouse, and they're more than 10  years younger than you, you'll use a different life expectancy table and probably take a smaller distribution. It's also a good idea to review and understand RMD rules for inherited IRAs.