Know the Rules for Taking RMDs from Your Retirement Savings

Required minimum distributions from traditional IRAs, 401(k)s now kick in at 73

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John Waggoner

AARP

Published March 30, 2020

/ Updated January 27, 2023

En español | People have a love-hate relationship with taxes. OK, it's mostly hate. And one of the things people — in this case, mostly retirees — really hate is taking required minimum distributions (RMDs) from their retirement savings accounts.

Why the hate? “They don’t want to be forced to take money out of their IRAs when they don’t need it,” IRA expert Ed Slott says. “They think, ‘I earned this money, and I want to use it when I want to use it.’ ” Even worse, RMDs are treated as taxable income, which can move them into a higher tax bracket. “It makes them extra-double angry,” Slott says.

The IRS feels differently. Though making pretax contributions to a tax-deferred retirement account such as a traditional IRA or 401(k) is a great way to build a nest egg, you can’t defer taxes forever. When you do finally start taking RMDs, Uncle Sam will finally start collecting federal income taxes on your withdrawals.

New rules delay RMDs until age 73

Under current rules, you must take your first required minimum distribution by April 1 of the year after you turn 73. If you hit 73 on June 30, 2023, for example, you’re going to have to yank some cash out of your IRA by April 1, 2024.

The extended April 1 deadline only applies to your first RMD. All subsequent RMDs are due by Dec. 31 of each year for that year. Keep in mind that means you could take two distributions in the first year that your RMDs kick in — one on April 1 for the prior year and one on Dec. 31 of that same year.

These RMD rules apply to retirement accounts including traditional IRAs, Simplified Employee Pension (SEP) IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, 401(k)s, nonprofit 403(b) plans, government 457 plans, profit-sharing plans and other defined contribution plans. Roth IRAs, which are funded with after-tax contributions, don’t require RMDs. If you’re still working in your 70s and have a traditional 401(k) or another defined contribution plan through your employer, you may be able to defer RMDs until April 1 of the year after you stop working.

How is your IRA’s RMD calculated?

Your RMD is based on the market value of all your IRAs as of Dec. 31 of the previous year. To get the amount of your RMD, you divide the value by your distribution period — a polite way of saying life expectancy — that’s estimated in the IRS Uniform Lifetime Tables.

Let’s say that you had $100,000 in an IRA on Dec. 31, 2022, and that you have to take an RMD by Dec. 31, 2022. You’re 75. Your life expectancy, according to IRS tables, is 24.6 years. Your RMD is $4,065.

You can take out more than the required minimum, if you want, although you can’t apply the extra amount to a following year’s RMD. But don’t take out less than your RMD: The IRS penalty is 25 percent of the amount you should have taken but didn’t. If you had an RMD of $10,000 that you didn’t take, you’d have to fork over $2,500 to the IRS. (You can request a waiver from the IRS if you have a good excuse for missing your RMD, but there’s no guarantee it’ll be granted.)

An RMD loophole for charitable contributions

If you are upset about having to take an RMD and pay the tax, and you’re in a position to make a generous charitable deduction, consider giving your RMD payout directly to charity. You won’t get a charitable deduction on your tax return, but your contribution will be excluded from your taxable income. You must direct your IRA custodian to make the check directly to the charity. If it’s made out to you, it will be counted as taxable income even if you turn around and donate the money to charity. The IRS calls this a qualified charitable contribution (QCD), and it only works for IRAs, not 401(k)s and other plans.

“It’s the best thing to do for RMDs, assuming you were going to give to charity anyway,” Slott says. The higher standard deduction that came with tax reform means that many people can no longer deduct charitable giving because they aren’t itemizing their returns anymore. If you donate from your IRA, however, you’ll still get the standard deduction and you’ll exclude all of the IRA money you give to charity. You can use up to $100,000 a year from an IRA to give directly to charity and qualify for the exclusion.

John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and  USA Today and has written books on investing and the 2008 financial crisis. Waggoner's  USA Today investing column ran in dozens of newspapers for 25 years.

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