Saving money in an Individual Retirement Account or a group retirement plan account, like a 401(k), can be one of the best ways to prepare financially for retirement.

But there are rules applicable to IRAs and 401(k)s that can trip up unsuspecting retirees. Known as required minimum distributions (RMDs), the rules require retirees to start withdrawing money and paying taxes on these withdrawals when they reach a certain age.

It’s important to consider RMDs when planning your retirement account withdrawals and taxes. They will factor into your planning, including which account you withdraw from first and your overall tax strategy in retirement.

What is an RMD?

Which retirement plans do RMD rules apply to?

RMD rules generally apply to pre-tax retirement accounts, meaning those for which you received a tax deduction for your contributions.³ Applicable retirement plans include:

• 401(k) plans
• 403(b) plans
• 457(b) plans
• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• Profit-sharing plans
• Other defined contribution plans

RMDs apply to the original account owner and any beneficiaries who may inherit one of these types of accounts. The RMD rules also apply to inherited Roth IRAs, even though they don’t apply to the original account owner.

Since 2024, all Roth accounts — including Roth 401(k) plans — are exempt from RMDs for the owner, but not for beneficiaries who may inherit one.

Read more: Can I contribute to a 401(k) and an IRA?

How to calculate RMDs

To calculate the amount of your RMD, you will divide the account balance on December 31 of the prior year by your life expectancy factor. The IRS has published life expectancy tables you can use for this purpose.⁴

There are three different life expectancy tables. Use the one that applies to your situation:

• If you inherited an IRA, use the Single Life Expectancy table (Table I)
• If you’re married, the sole beneficiary of your account is your spouse, and if he or she is more than 10 years younger than you, you use the Joint and Last Survivor table (Table II)
• All other original IRA owners use the Uniform Lifetime table (Table III)

For example, suppose Jane, a 75-year-old woman, is trying to calculate her RMDs for 2024. Jane ended the previous year with a 401(k) balance of $500,000. Based on the appropriate RMD table — the Uniform Lifetime table — Jane’s distribution period is 24.6.

Once Jane has found her distribution period, she should divide her account balance by that number. When she divides her account balance of $500,000 by her distribution period of 24.6, Jane finds that her RMD for 2024 is $20,325.20.

If you work with a financial professional, they will be able to help you calculate your RMD and factor that withdrawal into your overall financial plan.

Once Jane has found her distribution period, she should divide her account balance by that number. When she divides her account balance of $500,000 by her distribution period of 24.6, Jane finds that her RMD for 2024 is $20,325.20.

If you work with a financial professional, they will be able to help you calculate your RMD and factor that withdrawal into your overall financial plan.

Special considerations for calculating RMDs

Your marital status and whether you’re the original owner of the retirement account will impact the RMD table you’ll use and, therefore, your RMD for each year. Most account holders will use the Uniform Table, Table III.⁵ That table applies to:

• Unmarried owners
• Married owners whose spouses aren’t more than 10 years younger
• Married owners whose spouses aren’t the sole beneficiaries of their IRAs

Here’s what that table looks like:

If you don’t fall into one of the categories for Table III, you’ll use one of the other tables. For example, you’ll use Table II if you’re an owner whose spouse is more than 10 years younger and is the sole beneficiary of your IRA. You’ll use Table I if you’re an account beneficiary.

If you inherit a traditional IRA and the original owner had started taking RMDs at the time of death, you must continue to receive the distributions as previously calculated during the year of the original owner’s death. After this, the amount of your RMD will depend on your status as a beneficiary (e.g., a surviving spouse or minor child).

One rule change starting in 2022 for inherited IRAs is that the IRS included a transition rule for non-spouse beneficiaries who inherited an IRA prior to January 1, 2022, after RMDs have begun, and are using the Single Life Table. The transition rule has the life expectancies “reset” using the new tables.

Known as the 10-year rule under provisions of the Secure Act, beneficiaries of inherited retirement accounts may also be required to fully distribute assets from the account by the 10th year after the owner’s year of death, depending on the relationship to the original owner.

This “reset” will look like this: The beneficiary will “go back” to the year after the owner’s death and find their single life expectancy as of their age in that year using the new table. Then, one year will be deducted from the new life expectancy for each year since the first distribution year to get the divisor for the relevant post-2021 year.

This can be complex as there are different rules for different years. Talk to your financial or tax planning professional about your RMDs.

RMD penalties

If you fail to withdraw the RMD by the applicable deadline or the distribution isn’t large enough, there is a penalty of 25% of the portion you were required to withdraw but didn’t. The excise tax was previously 50%, but it was reduced in the SECURE 2.0 Act of 2022.

Another provision of SECURE 2.0 is that your penalty will be reduced to 10% if you correct the error within two years. This reduced penalty only applies to late withdrawals in 2023 or later.

Finally, your penalty may be waived if you establish the shortfall in distributions was due to a reasonable error and that reasonable steps are being taken to remedy the shortfall.

Clarifying common questions about RMDs

What triggers RMDs?

The RMD requirement is triggered by age. Until December 31, 2022, the age for taking RMDs was 72. However, for retirees who weren’t 72 by that date, the age for taking RMDs is 73.

How do I know what my RMD will be?

Your required minimum distribution is based on your retirement account balance and your distribution period according to the IRS uniform lifetime table generally. Your RMD may change each year based on this calculation. You can calculate your RMD yourself utilizing guidance from IRS Publication 590-B, or consult a financial planner to calculate it on your behalf.

Is it better to take my RMD monthly or annually?

For investment purposes, it may be better to take your RMD at the end of the year so your money has more time to grow in your investments. However, as many people rely on their RMDs to pay their living expenses throughout the year, monthly withdrawals often make more sense.

What can I do with my RMD if I don’t need it?

If you don’t need your RMD, there are several options available, including some which will help you avoid taxation on that money. If you’re okay with paying the tax liability, you can invest the money into a taxable brokerage account or roll it into a Roth IRA, where it potentially can grow tax-free for as long as you want. Beneficiaries who are at least age 70 ½ can consider making a Qualified Charitable Distribution from the IRA to a qualified charity.