8 Facts About Required Minimum Distributions You Need to Know

You’ve likely been salting away money in tax-deferred IRAs and employer-sponsored retirement accounts for decades. But once you reach your early seventies, you must start taking withdrawals and paying taxes on the money. These Required Minimum Distributions (RMDs) can be sizable and might even push you into a higher tax bracket. Here is what you need to know.

1. They begin when you turn 72

If you haven’t already begun taking RMDs, you will need to start when you turn 72. And your distributions must be taken each year by December 31.

An exception for first timers: You can take your initial distribution by April 1 of the following year you turn 72. So, if you turn 72 in 2022, you have until April 1, 2023, to take your RMD.

Note: By delaying your first distribution into the next year, you will need to take another RMD for that year by December 31. Two RMDs in a single year could trigger a higher tax bill.

Most tax-advantaged retirement accounts are subject to RMDs, including:

401(k) plans for private-sector employees

403(b) plans for schools and nonprofits

457(b) plans for state and local government workers

Traditional IRAs, SIMPLE IRAs and SEP IRAs

Roth 401(k) plans

Profit Sharing plans

Other defined-contribution plans

2. You can calculate your RMDs yourself: Here’s how

Calculate an RMD by taking your account balance at the end of previous year (as of 12/31) and dividing it by a “life expectancy factor” published by the IRS. Most account owners use the IRS’s Uniform Lifetime Table, which starts with a life expectancy factor of 27.4 years at age 72 and gradually drops.

Of course, you can always take out more. Calculate your estimated distribution by using Fidelity’s online RMD calculator.

The IRS recently updated its life expectancy tables, which take effect in 2022.

Account owner’s age Life expectancy factor Account owner’s age Life expectancy factor

72 27.4 97 7.8

73 26.5 98 7.3

74 25.5 99 6.8

75 24.6 100 6.4

76 23.7 101 6.0

77 22.9 102 5.6

78 22.0 103 5.2

79 21.1 104 4.9

80 20.2 105 4.6

81 19.4 106 4.3

82 18.5 107 4.1

3. RMDs change if you have multiple accounts

The math is a bit more complicated if you have a few tax-deferred accounts. For example, if you have more than one traditional IRA, you must calculate the RMD for each account. However, you can take the total distribution from one IRA or any combination of IRAs.

The rule is similar if you have two or more 403(b) plans.

But if you own multiple 401(k)s or 457 plans, you must figure the mandatory distribution for each and take the RMD from each account separately.

4. You’ll pay a penalty for not taking your RMD

If you miss the deadline or take less than required, you’ll owe a 50% penalty on the sum you should have withdrawn but didn’t. For example: If you were required to take out $20,000 but withdrew only $15,000, the penalty would be $2,500.

Correcting a mistake

The IRS may waive some or all of the penalty if you show that it was a reasonable error and you’re taking steps to remedy it. Here’s how:

Immediately withdraw the shortfall as soon as you notice it.

File IRS Form 5329 to report the shortfall and to request a penalty waiver.

Attach a statement that explains your error.

For more details, see the IRS instructions for Form 5329.

5. Roth IRAs don’t have RMDs (with one exception)

Roth IRAs don’t have RMDs unless you inherited the account. That’s because you’ve already paid taxes upfront on your contributions. Your investment gains are also tax-free as long as you’re at least 59½ and have owned the account for five years. Roth 401(k)s, though, have RMDs (albeit tax-free.) You can avoid them by rolling your Roth 401(k) into a Roth IRA before reaching RMD-age.

6. RMDs are taxed as ordinary income

Your RMDs will be taxed as ordinary income. (If you made non-deductible contributions to a traditional IRA, a portion of your RMDs won’t be taxed.)

RMDs will boost your adjusted gross income (AGI), which can trigger other tax consequences. For instance, you could be pushed into a higher tax bracket, your Social Security benefits may be taxed, or you might have to pay higher Medicare premiums. And you may lose out on other tax breaks tied to income.

7. You don’t have to take an RMD from a current employer’s plan

Generally, if you’re still working, you don’t have to take distributions from your current employer’s retirement plan. (You’ll still need to take them from IRAs and retirement plans from former employers.)

Exceptions: Even if you are not retired, you’ll need to take distributions once you reach RMD-age if your employer’s plan requires it or if you own more than 5% of the business where you work.

8. You can do good and save on taxes

You can make gifts – up to $100,000 annually – directly from your traditional IRA to a charity beginning at age 70½ in what’s called a Qualified Charitable Distribution. And once you turn age 72, these charitable distributions count toward your RMD for the year.

You don’t get a charitable deduction on your tax return for your gift. However, the distribution isn’t added to your adjusted gross income like RMDs, which means you could be eligible for income-based tax breaks that you otherwise wouldn’t receive.

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