How are required minimum distributions calculated?

If you are the owner of an IRA, 401(k), or other qualified retirement plan, there are three things you probably know about RMDs:

• RMD stands for required minimum distributions.
• You have to do something about RMDs by the time you turn age 73.
• You could be in trouble with the IRS if you don’t do it right.

Does that sum it up? If so, you’re not alone. RMDs are one of the least understood components of a retirement plan and, frankly, one that many of us don’t give much thought to until we have to. 

Understanding RMDs

What are required minimum distributions? In a nutshell, they are the minimum amount of money that a person must withdraw from a retirement account each year, starting at age 73. In general, RMD rules apply to the following plans:

• 401(k)
• 403(b)
• 457(b)
• IRA (traditional)
• SEP
• SIMPLE IRA

RMD rules do not apply to Roth IRAs as long as the original owner remains alive. After that, a surviving spouse will need to include them in his or her calculations. Starting in 2024, they will not apply to Roth 401(k)s, either.

Calculating RMDs

The age at which RMDs are first required has changed twice in recent years. It was 70½ for many years. But in 2020, the SECURE Act made it 72. And in 2022, the SECURE 2.0 Act made it to 73 for those who turn 72 in 2023 or later.¹

You can delay RMDs until April 1 of the year after you turn 73, but you will have to take RMDs again by the end of the year, so delaying them could push you into a higher tax bracket for that year.

How to Calculate RMDs

To calculate RMDs on a retirement account, take the end-of-year balance and divide it by a life expectancy factor determined by the IRS. The life expectancy factor, or “Distribution Period” as it is also called, is based on your age and can be found online at the IRS website.
 
Note: There are three tables to choose from, so be sure to select the one that applies to you. For the purposes of this article, we’ll use the Uniform Lifetime table, which is the most widely used table.

Using this table, you can see that a 73-year-old taking RMDs for the first time would divide a $200,000 balance by 26.5.

If you and your spouse have several retirement accounts, your RMD calculations might look something like this: 

If you have multiple accounts, keeping track of them could turn into a headache, which is why many retirees consolidate their retirement accounts before they reach age 73.

It’s good practice to check with the IRS on an annual basis for updates on required minimum distributions, as the details surrounding taxes, age, and value can change.

RMD choices

While the IRS requires you to take your RMDs by the end of the calendar year, how you do it is completely up to you. Most plan administrators give you the option of monthly, quarterly, or annual withdrawals.

IRA and 403(b) owners have the option of withdrawing their total RMD amount from whichever plan (or plans) they like; however, 401(k) and 457(b) participants must withdraw the required percentage from each plan separately.

Double-check your RMD calculations

If you fail to take some, or all, of your RMDs, the amount not withdrawn will be subject to a 50% penalty tax. Although your RMDs may be calculated by the IRA custodian or retirement plan administrator, you are responsible for making sure the correct RMD is taken.

Given the hefty penalty, you will want to go over the numbers carefully and have an accountant or tax specialist check your (or your plan administrator’s) calculations. You may also find it helpful to use one of the handy RMD calculators available online.
 

Safeguarding your RMDs

Your retirement can last for several decades, and retirement expenses can increase as you get older. So, it’s important to have a plan in place that will support your lifestyle and cover your expenses for the rest of your life. You may have to take RMDs, but you don’t have to spend them. Retirees often reinvest some of their distributions in other savings vehicles.

You don’t have to wait until RMDs are required to redistribute your tax-qualified savings. You can, for example, purchase an annuity  with some of your tax-qualified savings. This will give you lifetime income (similar to what you would get from a traditional pension). You’ll owe taxes on the income, but you won’t have to worry about RMDs on the money invested in the annuity.

Additionally, if you’re concerned that you may need additional income in your later retirement years, you can use some of your tax-deferred savings to purchase a qualified longevity annuity contract (QLAC). RMDs are deferred on the money you invest in a QLAC, and payouts are not required until you reach age 85. Your tax advisor can help you better understand your options.

Building a legacy

If you have children or other younger loved ones, you can use RMD money to build your legacy.This can include contributions to a retirement fund for someone else, purchasing a life insurance policy for a grandchild, or contributing to an education savings plan for a grandchild. If you need help with your retirement income planning, a New York Life agent will be happy to get together with you for a free, no-obligation meeting. Click here to find an agent near you.

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This article is provided for general informational purposes only. Neither New York Life Insurance Company (NY, NY), nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.

¹Javier Simon, “How to Calculate Required Minimum Distribution (RMD),” SmartAsset, June 2, 2023.