Required minimum distributions made easy for 2024

What is an RMD? Required minimum distributions or RMDs, are mandatory withdrawals you must take from your retirement account when you turn 73. RMDs apply to tax-deferred accounts. Tax-deferred in simple terms means that you delay paying taxes on your contributions until you are taking distributions during retirement.

Retirement plans that require RMDs include but are not limited to traditional IRA, 401(k) plans, 403(b), 457(b), SEP-IRA, SIMPLE IRA, and other retirement plans with tax-deferred setup. Roth IRA does not require RMDs. You could also get away with the required minimum distributions on the Roth 401(k) by rolling over your funds into a Roth IRA.

Failure to take RMD may result in a 25% tax penalty or 10% if RMD is timely corrected within 2 years.

Here is everything you need to know about requirement minimum distributions.

Table of Contents show

What is an RMD?

When you make contributions to your retirement accounts, some plans will allow you to make contributions with before-tax wages and grow the account on a tax-deferred basis. This means you delay paying taxes on your contributions and earnings from them until you have reached retirement age.

This strategy allows you to grow your retirement safety net much faster. Delaying taxes, however, does not mean you will never pay taxes.

To recover unpaid taxes, the IRS forces you to start withdrawing a certain amount of money from tax-deferred retirement accounts when you turn a certain age. These withdrawals are known as required minimum distributions or RMDs for short.

For 2024, you are required to start taking RMDs when you turn 73 if you reach 72 after Dec 31st, 2022, according to the Internal Revenue Service(IRS).

Failure to take RMDs may result in a 25% excise tax on all amounts you did not withdraw on time. If the RMD error is corrected within 2 years, the RMD penalty will be reduced to 10%, according to the Internal Revenue Service.

For example, if you were supposed to withdraw $3,000 and only withdrew $2,000; you may end up with a $250 excise tax on that $1,000 you did not distribute.

RMDs quick notes

A Roth IRA does not require RMDs when the owner of the account is still alive. If you inherit the account, however, you might be required to take RMDs and distribute the account within 10 years.

You must start taking RMD when you turn 73 in 2024.

RMDs can be delayed until April 1 of the year after your RMD is required. For example, if you turned 73 in Feb 2024, you can delay RMD until April 1, 2025.

RMD only applies to tax-deferred accounts such as pre-tax 401(k), traditional IRA, SIMPLE IRA, 403(b), etc.

RMDs are no longer required for non-IRA Roth accounts starting from 2024, according to the IRS. These accounts include Roth 401(k) and Roth 403(b).

How to calculate the required minimum distribution(RMD)?

To calculate your RMDs, divide your previous December 31 account balance by the life expectancy factor. The life expectancy factor is a set of numbers the IRS publishes in Uniform Lifetime Tables to help you calculate your RMDs every year.

RMD Formula

RMD = Account balance/ LIfe expectancy factor

The IRS polishes Uniform Lifetime Tables in its publication 590-B. After finding your life expectance factor, calculate your RMD by dividing your account balance by that factor.

For example, according to the Uniform Lifetime Tables published by ED SLOTT and company, if you are 73 in 2024, your life expectancy factor will be 26.5 years. Let’s assume that your IRA value is $350,000.

To calculate your RMD amount in this case, divide $350,000 by 26.5 years which will yield $13,207.5. That is you must start withdrawing at least $13,207.5 from your IRA every year when you turn 73.

What happens when I don’t take RMD?

By law, you are required to take RMDs if you have an account that requires them after you turn 73. Failure to take RMDs or taking less than you were supposed to will result in a tax penalty.

If you don’t take the full required minimum distribution amount, you may end up with a 25% tax on the portion of RMD you did not distribute. The RMD penalty was changed from 50% to 25% or 10% of RMD error is corrected within 2 years by the SECURE 2.0 ACT on March 14, 2023.

For example, if your RMD for the year was $5,500 and you only withdrew $3,500; you could end up with a $500 tax on the $2,000 you did not withdraw.

Can the 25% tax penalty be waived on RMDs?

You might end up distributing less than the required minimum distribution amount. If this happens and you think the reason is due to acceptable errors and the issue is being taken care of; you can request a waiver of the RMD penalty. To do so, take the following steps.

Complete form 5329, and
Attach a letter to the form explaining the situation and how it is being handled.

If you need instructions on how to complete Form 5329 or where to submit it, refer to the instructions for Form 5329.

Retirement plans that require RMDs

There are many retirement plans affected by RMDs. By default, most tax-deferred plans come with required minimum distributions when you turn 73.

The following is a list of most accounts affected by RMDs.

SIMPLE IRAs
401(k) plans
SEP IRAs
403(b) plans
457(b) plans
Traditional IRAs
Profit-sharing plans
Inherited plans
Roller overs
etc.

You can choose to withdraw RMDs in small payments or a one-sum payment. The only thing to keep in mind is that your total distribution for the year must be equal to or greater than the RMD requirement for the year.

Can I withdraw more than the minimum required distributions?

Yes, you can withdraw more money than the required minimum distributions. The purpose of RMDs is to make sure that the IRS recovers taxes that were not paid on your contributions. Keep in mind that your withdrawals will be taxed as an ordinary income.

So, if you choose to withdraw more than the RMD value, your tax liability will also be higher. Working with a financial planner or advisor is a great way to make sure that you meet all required withdrawals without paying too much tax.

Do I pay taxes on RMDs from a tax-deferred account?

Yes, you pay tax on RMDs from tax-deferred accounts. Tax-deferred means you delay paying taxes on your contributions until a later date. For this reason, any before-tax contribution to the account together with the employer match will be taxed. The taxes you pay are calculated as an ordinary income tax based on your income tax rate (tax bracket).

Do I take RMDs on a Roth IRA?

The Roth IRA account does not require RMDs. This is one of the benefits of the Roth IRA that make it attractive. The account also allows you to transfer funds to your beneficiaries tax-free.

However, once the original account owner dies, beneficiaries must start distributing the account. The entire account must be distributed within 10 years from the death of the original account owner.

The IRS has some exceptions to this rule. If you fall into one of the following categories, you will be exempt from the inherited Roth IRA10-year rule.

You are a surviving spouse
An individual who is chronically ill or disabled
Minor who has not reached the age of majority
A person no more than 10 years younger than the original account owner

First RMD deadline: When Do I take my first RMD?

Generally, you are required to take RMDs by December 31 of each year. Any amount you did not take by the end of the year may be taxed at a 25% tax rate.

When it comes to taking your first RMDs, however, there is a slight difference in the deadline. Your first RMD must be completed by April 1 of the following year after you turn 73, starting from 2024. For example, if you turned 73 in 2024, you will have up to April 1 2025 to complete your first RMD.

By delaying your first RMD to the following year after you turn 73, you will end up with two RMDs in the same year. This is because you would have taken your first RMD between Jan 1 and April 1 and taken your second required minimum distribution by December 31 of the same year.

This option can increase your tax liability for the year due to income taxes on each RMD. For example, if your RMD is $100,000 and you take your first and second RMD in the same year, you will end up with a $200,000 taxable income (assuming you did not have any other taxable income for that year).

Based on tax brackets published by Bankrate, this $200,000 will put you into the 32% tax rate. On the other hand, if you only took one RMD, your income tax on a $100,000 RMD will land you at a 24% tax rate.

How to avoid RMDs?

Although RMDs are required for most tax-deferred accounts, you can avoid RMDs by making smart financial decisions. The following are tips you can use to avoid RMDs on your account.

Roll over your money into A Roth IRA. By rolling over money from your tax-deferred account into a Roth IRA, you will pay taxes on the money you converted. After that money has settled in your Roth account, you will no longer have to worry about RMDs or taxes.

Know when you need RMDs or not. All retirement accounts do not require RMDs. Before you start taking required minimum distributions from your account, make sure that your account requires them.

Continue working. If you have a retirement plan such as a 401(k) plan and you don’t own 5% or higher of the company, you can delay RMDs if you keep working until you officially retire.

Take your first RMD in the year you turn 73. This will prevent you from taking two RMDs in the following year. Which in turn will reduce your tax liability.

Donate money to a qualified charity: If you don’t want to give free money to the government but want to contribute to a good cause, donate your RMD to a qualified charity. This financial move is known as the Qualified Charitable Distribution(QCD) rule and you will not pay taxes on the amount you donated as long as you are 70½. For 2024, the amount must be no more than $100,000 and must come directly from your IRA to the charity. In addition, this waiver will hold only if the charity is recognized as qualified by the IRS. According to the Internal Revenue Service, if both spouses are at least 70½ and both have IRAs, each can exclude up to $100,000 on their tax returns.