The formula for required minimum distribution (RMD) calculates the smallest amount retirees must withdraw annually from certain retirement accounts starting at age 73. The IRS uses life expectancy tables to determine the withdrawal amount.
The RMD formula divides the prior year-end balance of your retirement account by a factor from the IRS life expectancy table. This factor decreases as you age, requiring larger withdrawals over time.
For example, if your account balance was $100,000 at the end of the previous year and your life expectancy factor is 25.5, your RMD would be $100,000 รท 25.5 = $3,921.57.
RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and other defined contribution plans. Roth IRAs do not require RMDs during the original owner's lifetime.
| Account Type | RMD Rules |
|---|---|
| Traditional IRA | RMDs start at age 73 |
| 401(k) | RMDs start at age 73, unless still working and not a 5% owner |
| Roth IRA | No RMDs during the original owner's lifetime |
Many people confuse Roth IRAs with other retirement accounts regarding RMDs. While Roth IRAs do not require withdrawals during the owner's lifetime, inherited Roth IRAs are subject to RMD rules.
Another misconception is that RMDs only apply to individuals over 70. However, the Secure Act 2.0 raised the RMD age to 73, and it will increase to 74 in 2033.
When helping my parents plan their retirement, I used the IRS life expectancy tables to calculate their RMDs. We found that their withdrawals would increase each year, which helped them budget accordingly.
RMDs ensure that retirement funds are eventually distributed and taxed. Failing to take RMDs can result in a 50% penalty on the amount not withdrawn. According to the IRS, over 300,000 taxpayers missed their RMDs in 2020, highlighting the importance of understanding these rules.