Different accounts, different rules
The rules on RMDs depend on the types of retirement account(s) you have and who you are:
“Qualified” workplace plans. RMDs apply to employer-sponsored retirement plan accounts to which you contribute pretax dollars. These include 401(k) plans (typically from for-profit businesses), 403(b)s (for education and nonprofit workers) and 457(b)s (for government employees.
In general, you must start withdrawing from your account if you’re at least age 72 and retired. If you have multiple employer-sponsored retirement plan accounts, you must calculate and satisfy the RMD individually for each account. (With multiple 403(b) accounts, you must calculate the RMD for each account but can withdraw the total from any of them.)
Roth and after-tax workplace plans. RMDs apply to employer-sponsored retirement plan accounts to which you contribute after-tax dollars or contribute to a Roth account. These RMD requirements follow the same rules as those for the pretax employer plans.
Traditional Individual Retirement Accounts (IRAs). You must start withdrawing from traditional (tax-deductible) IRAs if you’re at least age 72 — whether you’re still working or not. If you have multiple traditional IRAs, you may calculate your RMD for all your accounts but can withdraw that amount from any of the accounts or a portion from each.
Roth IRAs. You don’t have to take RMDs on Roth IRAs you opened, but Roth accounts you inherited are subject to RMDs. Also, if you plan to convert a traditional IRA to a Roth after age 72 (to take advantage of potentially tax-free withdrawals on Roths), you’ll need to take your RMD for the tax year before you make the switch. If you plan to roll over your Roth 401(k) to a Roth IRA to get around the requirement for RMDs, you should know that the holding period for the Roth 401(k) does not transfer to the Roth IRA, so unless you have had the Roth IRA for at least five tax years, any distributions of earnings will be taxable. You may want to plan ahead and open the Roth IRA early in preparation for the rollover of the Roth 401(k).
Business owners. If you participate in a qualified employer-sponsored retirement plan and own 5% or more of the business that sponsors the plan, you must take your RMD at age 72 regardless of whether you’re still working or not.
How much must you withdraw?
RMD amounts vary based on a range of factors, and everyone’s is different. To do the math yourself, divide the balance of the value of a retirement account at the end of the previous year (December 31) by your life expectancy factor, which is determined by the IRS. You can find yours on IRS Publication 590-B Opens in new window. The table you should use to find your life expectancy Opens in new window is based on various factors, such as if your spouse is more than 10 years younger and is the sole beneficiary of your retirement account or if you’re the beneficiary of someone else’s account.
If you have employer-sponsored retirement accounts, you’ll need to calculate and take an RMD from each account. But if you own multiple traditional IRAs or tax-deferred 403(b) accounts, you have different options. For example, you may calculate the RMD separately for each IRA account, then withdraw the total amount from just one or a few accounts.
Important: You can ask your account custodian or plan administrator to calculate your RMDs, but it’s up to you to make sure the amounts you withdraw are accurate.
Different deadline for subsequent RMDs
While you generally must take your first required withdrawal by April 1 in the year after you turn 72, you must make all subsequent required distributions by December 31 of the year in which the RMD is due.
RMDs and your retirement income strategy
You can make certain moves before and after age 72 to help generate retirement income, lower taxes on your withdrawals and transfer wealth to kids and grandkids. So, it’s important to plan ahead. What’s more, if you don’t comply with the rules and properly manage your RMDs, your retirement income strategy could be at risk. Keep in mind:
- Income from RMDs can push you into a higher tax bracket even though you’re retired.
- It could affect the premium you’ll pay for part B Medicare coverage as those are determined by the retiree’s reported income.
- Retirees could face a 50% IRS penalty for failing to make RMDs.
What you can do now
Review all your potential sources of retirement income. These might include traditional “defined benefit” pensions, 401(k)s, 457s, or 403(b) accounts, traditional Individual Retirement Accounts (IRAs), Roth IRAs, Social Security, annuities and personal savings.
Determine the taxability for withdrawals from each account and what it might be if your income sources change.
Determine which assets are subject to RMDs. These distribution rules apply to many retirement plans and generally start on April 1 following the year individuals turn 72.
Work with your tax advisor to create a plan for withdrawals that minimizes taxes now and when you pass on assets to your heirs.