If you’re still working at age 73, and your retirement savings are sponsored by a previous employer, you must take a Required Minimum Distribution (RMD) from your retirement account each year. How much you must withdraw each year depends on your account balance and life expectancy factor.
Your withdrawals are taxed at your income tax rate unless your retirement money is kept in a Roth IRA account (withdrawals from a Roth IRA are tax-free). Continue reading to learn more about RMDs and what they mean for your retirement savings.
RMD requirements
According to the IRS, you must take RMDs if you’re 73, still working, and have open retirement accounts with a former employer. You must take your annual RMD by December 31st each year – even after retirement. If you’re still employed by the company sponsoring your retirement plan, you’re exempt from taking RMDs until you retire.
However, if you just turned 73, you can delay taking your RMD until April 1st of the following year. This rule only applies to your first RMD. Additional requirements vary based on the type of retirement account you have. We’ve listed the specifics below:
Roth IRAs and inherited IRA accounts
Owners of Roth IRA accounts do not have to take RMDs in their lifetime. However, if you inherit an IRA account from a deceased family member, you are subject to the RMD rules once you turn 73.
401(k)s and other employer-sponsored retirement plans
The age requirement also applies to 401(k) plans and other retirement accounts, such as 403 (b)s, 457(b)s, or Simplified Employee Pension (SEP) plans. If you don’t want to start taking RMDs, you can delay withdrawing from your account until you retire as long as you’re still working for the company sponsoring your retirement plan.
Penalty for not taking an RMD
If you miss taking an RMD, you will face a 25% tax on the amount that would’ve been withdrawn from your retirement account. However, the IRS allows you to request a penalty waiver by filing Form 5329 and attaching a letter explaining why you didn’t take an RMD. The IRS will revoke the penalty from your distribution if your missed withdrawal was due to a “reasonable error” and you’re taking the necessary steps to remedy the situation.
How does the IRS know if I take my RMD?
When you start taking RMDs, you’ll get a Form 1099-R from your employer or banking institution for tax reporting purposes. The IRS also receives a copy of the form. You’ll enter the income reported on the 1099-R on your 1040 to help determine your total tax liability or refund.
How are RMDs taxed?
RMDs are included in your AGI and are taxed at your income tax rate. Taxes for RMDs are typically taken out when you make a withdrawal from your account — but if your distribution is from a Roth IRA, you aren’t required to pay taxes every year. RMDs are tax deductible if you donate the funds to a qualified charitable organization – this is known as a Qualified Charitable Distribution.
How to calculate RMDs
RMDs are calculated using your life expectancy factor divided by your retirement account balance on December 31st of the prior year. Your retirement account custodian can estimate your life expectancy factor, or you can use Table III, found in IRS Publication 590-B. Once you know the distribution period applicable to your age, divide that number by your retirement account balance on December 31st of the previous year.
Note: if your spouse is the only beneficiary of your retirement account and is 10 or more years younger than you, use Table II on IRS Publication 590-B to determine your life expectancy factor.
Here’s an example:
Let’s say you’re unmarried, 75 years old, and the ending balance for your IRA was $300,000. First, you’ll find the life expectancy factor on Table III (it’s 24.6). Now, to calculate your expected RMD for 2024, you’ll divide $300,000 by 24.6.
300,000/24.6 = $12,195
How do you report an RMD on your tax return?
You must report your RMD using Form 1099-R when you file your taxes. This form reports retirement distributions of $10 or more during the year. If you’re ready to file your tax return, TaxSlayer can identify all the forms you need and walk you through each step of the process.
Required minimum distribution FAQs
RMDs have specific requirements according to your age and retirement savings. We’ve broken down answers to some common RMD questions below.
What is RMD?
An RMD is the minimum amount you must withdraw from your retirement account if you are still employed at age 73. The amount you’re required to withdraw depends on your life expectancy factor and how much money is in your retirement account.
Why do I have to take an RMD?
If you’re growing your retirement savings tax-free, you must eventually pay taxes on your contributions. RMDs exist to collect taxes on retirement contributions.
How do I calculate my RMD?
You can calculate your RMD by dividing your retirement savings balance by your life expectancy factor. You can calculate your expected RMD at the beginning of the year, and you must take it before the end of the year to avoid penalties.
Should I have taxes withheld from my RMD?
Taxes will be automatically withheld from your RMD unless your retirement account is a Roth IRA.
At what age do RMDs stop?
RMDs don’t stop once they begin. So, if you decide to retire after you start taking RMDs, you must continue making the withdrawals. If you pass away, your RMDs can go to a beneficiary. If your retirement account does not have a beneficiary, the account becomes part of your estate.
Can I avoid taking RMDs?
If you’re 73 or older, you can avoid taking RMDs if you’re still working for the company that sponsors your retirement accounts.
Do RMDs affect Social Security?
Since RMDs typically increase your taxable income, your Social Security and Medicare payments may be impacted. For example, your Social Security benefits may be taxed if your RMD pushes you into another tax bracket.
