Why the Government Eventually Requires You to Withdraw From Certain Accounts
By the end of this lesson, you’ll understand:
Traditional retirement accounts grow tax-deferred, meaning taxes haven’t yet been paid on the original contributions or the growth. The government doesn’t allow that deferral to continue indefinitely.
At a certain age, the IRS requires you to begin withdrawing a minimum amount from certain accounts each year, whether or not you actually need the income. Understanding this requirement in advance prevents an unwelcome surprise, and a potential penalty, later.
A Required Minimum Distribution (RMD) is the minimum amount the IRS requires you to withdraw annually from certain tax-deferred retirement accounts, starting at an age set by federal law.
The RMD is a floor, not a ceiling, you can always withdraw more than the required minimum. It exists specifically to ensure that tax-deferred accounts eventually generate taxable income, rather than growing tax-deferred indefinitely.
RMDs generally apply to tax-deferred accounts, including:
Roth IRAs generally do not require RMDs for the original account owner during their lifetime, under current law. Roth 401(k) accounts have had their RMD treatment change through recent legislation, so this is worth confirming directly against current rules rather than assuming.
Inherited retirement accounts follow their own separate distribution rules, which differ depending on your relationship to the original owner, covered briefly in a later lesson on beneficiaries.
The age at which RMDs must begin has been adjusted upward more than once through federal legislation in recent years. Because this age has changed and could be adjusted again, this lesson intentionally doesn’t state a specific number, confirm the current required beginning age directly through the IRS or your account provider based on your birth year.
This is one of the more important figures to verify with an up-to-date source as you approach this stage, rather than relying on a number you may have heard years earlier.
Your RMD is generally calculated by dividing your retirement account balance, as of the end of the previous year, by a life expectancy factor published in IRS tables.
As a simplified illustration only: suppose an account had a $400,000 balance at the end of the prior year, and the applicable IRS life expectancy factor for that age is 24.6.
This is a simplified illustration. The exact factor depends on your specific age and, in some cases, your beneficiary’s age, confirm the correct factor from current IRS tables or through your account provider, many of which calculate this figure for you automatically.
If you have multiple accounts of the same type, such as several traditional IRAs, the RMD rules generally allow you to calculate each account’s requirement separately but withdraw the combined total from any one or a combination of those accounts, though 401(k) accounts generally follow a stricter per-account withdrawal rule. This is worth confirming with your account provider based on your specific accounts.
Failing to withdraw the full required amount by the applicable deadline can trigger an excise tax penalty on the shortfall. This penalty has been adjusted by recent legislation, so the current rate should be confirmed rather than assumed.
Most account providers offer automatic RMD calculation and withdrawal services specifically to help account holders avoid missing this requirement, which is worth setting up once you approach the applicable age.
An RMD sets a mandatory floor on withdrawals from applicable accounts each year, regardless of whether your own withdrawal strategy, like the 4%-based approach covered in the previous lesson, would otherwise suggest withdrawing less.
This can create tension in a down market year: an RMD may require selling investments at a lower value than you’d prefer, which is worth planning around in advance rather than discovering in the moment.
Some retirees who are charitably inclined use a Qualified Charitable Distribution (QCD), which allows a portion of an RMD to be directed to a qualifying charity in a way that can be more tax-efficient than withdrawing the funds directly. This is a more advanced strategy worth exploring with a tax professional if it fits your situation.
Linda is approaching the age her RMDs are required to begin. She contacts her IRA provider, who calculates her first required distribution using her account balance and the applicable IRS life expectancy factor.
Her provider offers to set up an automatic annual withdrawal, calculated fresh each year based on her updated balance and age, which Linda sets up to avoid having to recalculate and remember the deadline manually.
She also reviews how this required withdrawal fits into her broader retirement income plan, since it now represents a mandatory piece of her annual income, alongside Social Security and her other planned withdrawals.
Relying on an outdated figure can lead to missing the deadline for a first RMD.
The first RMD has a specific, sometimes different deadline than subsequent years, worth confirming directly rather than assuming it matches later years.
Someone with multiple old 401(k)s or IRAs needs to account for the RMD requirement across all of them, not just the account they check most often.
An RMD taken without considering the rest of a withdrawal plan can create an unplanned tax or cash flow situation.
RMDs apply to all of my retirement accounts, including Roth IRAs.
Roth IRAs generally don’t require RMDs for the original owner during their lifetime under current law. Traditional accounts are generally where this requirement applies.
I can just leave the money in the account if I don’t need it.
Once you reach the required beginning age, the withdrawal is mandatory for applicable accounts, regardless of whether you need the income.
My RMD amount stays the same every year.
The RMD is recalculated annually, based on your updated account balance and the applicable life expectancy factor for your current age.
I have to spend my RMD once I withdraw it.
An RMD only requires the money to be withdrawn from the tax-deferred account. Once withdrawn, you can spend it, save it, or reinvest it in a taxable account, as you choose.
Some employer plans allow you to delay RMDs from that specific employer’s plan while you’re still actively working there, under certain conditions, this doesn’t apply to IRAs. Confirm the rule for your specific plan.
Yes. The RMD is a minimum, not a maximum. You can withdraw more if it fits your broader plan.
Inherited accounts generally follow separate rules based on your relationship to the original owner, which is covered in the next lesson on beneficiaries.
Generally yes, for a traditional account, the withdrawal is typically taxed as ordinary income, the same as other traditional account withdrawals.
Generally yes, most providers allow you to structure withdrawals in whatever timing works for you, as long as the full required amount is withdrawn by the applicable deadline.
If you’re within a few years of the applicable RMD age, contact your account provider to confirm the current required beginning age for your birth year and ask whether they offer automatic RMD calculation.
Setting this up in advance removes the risk of missing a deadline once the requirement actually applies to you.
You now understand how required withdrawals work. The next lesson turns to a different, often underestimated retirement expense: healthcare.
In the next lesson, you will learn:
Withdrawal strategy addresses how much income you’ll have. The next lesson addresses one of the biggest places that income needs to go.
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