Retirement & Financial Planning: Understanding Required Minimum Distributions

Certain retirement plans require minimum distributions at age 73, although you can start taking distributions at 59.5 years of age. The plans include 401(k) plans, profit-sharing plans, 403(b) plans, 457(b) plans, IRAs, SEPs, SARSEPs and Simple IRAs. The required minimum distribution rule does not apply to Roth IRAs or Designated Roth accounts as long as the owner is alive. However, once the Roth IRA or Designated Roth account owner dies and the beneficiary receives the account, required minimum distributions kick in.

When Does the Required Minimum Distribution Start?

As of the first quarter of 2025, required minimum distributions start in the year you turn 73. Because the first payment is not due until April 1 of the following year, you have some flexibility. However, postponing it will cause you to have to take two payments in the second year, as the second year’s payment is due at the end of the second year. Thus, you could take a payment in March of the year after you turn 73, but you must take the second RMD by the end of December of the same year.

Calculating and Withdrawing Required Minimum Distributions

The amount the Internal Revenue Service (IRS) requires you to take is based on your life expectancy and the balance of your account. The Uniform Lifetime Table (Table III) is the most common table used to determine your required minimum distribution. Table II is for those who have spouses that are more than 10 years younger and are the sole beneficiary. Table I is for beneficiaries.

The IRS taxes you at your ordinary income tax rate on withdrawals. The amount you must withdraw changes from year to year as it is based on life expectancy.

Steps to Calculate Your Required Minimum Distribution

You must calculate the required minimum distribution each year. The table you use depends on your circumstances.

• Step 1: Determine the correct table.
• Step 2: Locate your age. If you are 73 years of age, your distribution period is 26.5 years.
• Step 3: Obtain the balance of your retirement account as of December 31 for the previous year.
• Step 4: Divide the amount by the number in the appropriate lifetime table. This is your required minimum distribution.

For example, if your retirement account’s balance was $500,000 on December 31 of the previous year and you are 73 years old, 500,000 divided by 26.5 equals $18,867.92, which is the amount you withdraw. You will pay your regular tax rate on this distribution.

You can also use an online calculator to determine your required minimum distribution.

Penalties for Missing Required Minimum Distribution Deadlines

If you do not withdraw the full amount of the required minimum deposit by the due date, the amount you fail to withdraw is subject to a 25 percent excise tax. However, if you correct the issue within two years, the penalty drops to 10 percent.

If you can prove the shortfall in distributions was “due to reasonable error,” and you are taking reasonable steps to rectify the error, the IRS may waive the penalty. You must file Form 5329 along with a letter of explanation to request the tax waiver.

Potential Tax Strategies for Required Minimum Distributions

Depending on the amount in your retirement account and your life expectancy based on one of the three tables, the tax burden could be significantly high. You can use one or more tax strategies to defer taxes. It is always best to speak with a tax professional prior to the date of your first required minimum distribution unless you plan on paying the tax each year.

Remove Funds Early

At 59.5 years of age, you can start taking money out of your retirement accounts without paying a tax penalty. When you take larger distributions in the earlier years of your retirement, you can reduce the balance of your account, which means lower required minimum distributions. However, the only way this makes sense is if you are in a lower tax bracket.

This option also has the benefit of possibly delaying your Social Security benefits. For each year you wait to take them, the amount you receive increases.

Converting to a Roth IRA

You can transfer your RMDs to a Roth IRA, as this is one of the few retirement accounts that do not require RMDs. However, you will have to pay the tax on the amount of the transfer in the year it occurs.

Work Longer

If your retirement account is a 401(k) plan through your employer, you are not required to take RMDs while you are still working for that employer. You can also delay Social Security benefits, which increases them for each year you wait.

Check into a Qualified Longevity Annuity Contract (QLAC)

A QLAC is a deferred annuity contract. If you use retirement funds to purchase the annuity, you can receive payments at a later date. Payments are required with QLAC accounts, but not until you turn 85. QLACs have a limit as to how much you can put into them. Currently, it is up to $200,000.