RMDs explained: ages, the table and the penalty

Money in a traditional 401(k) or IRA has never been taxed. Required minimum distributions (RMDs) are how the IRS makes sure it eventually is: from a certain age, you must withdraw at least a set amount each year, and pay income tax on it.

Which accounts have RMDs

Traditional IRAs, SEP IRAs and SIMPLE IRAs, and workplace plans such as 401(k)s, 403(b)s and 457(b)s. Roth accounts don't: in the IRS's words, "the RMD rules do not apply to Roth IRAs or Designated Roth accounts while the owner is alive." (Beneficiaries who inherit them are a different story.)

When they start

The starting age depends on the year you were born:

People born in 1959 are a wrinkle. The SECURE 2.0 law can be read as giving them both 73 and 75; the IRS's proposed regulations say 73, and the final regulations left that paragraph open. Until the rule is settled, plan on 73.

One exception: if you're still working, you can usually delay RMDs from your current employer's plan until the year you retire, unless you own more than 5% of the business. It doesn't apply to IRAs, or to plans from past jobs.

How the amount is worked out

Each year's RMD is the account's balance on December 31 of the previous year, divided by a "distribution period" from the IRS's Uniform Lifetime Table in Publication 590-B. The divisor shrinks as you age, so the share you must withdraw grows.

At 73 the divisor is 26.5. With $500,000 in a traditional IRA at the end of the previous year, the RMD is $500,000 ÷ 26.5, about $18,868, or 3.8% of the balance. At 75 the divisor is 24.6, which is about 4.1%.

If your spouse is your sole beneficiary and more than 10 years younger, you use a different table (the Joint and Last Survivor Table), which gives smaller RMDs.

You work out each IRA's RMD separately, but you can take the total from any one or more of your IRAs. The same goes for 403(b) contracts among themselves. RMDs from 401(k) and 457(b) plans must come out of each plan separately.

Deadlines

Your first RMD is due by April 1 of the year after you reach RMD age. Every one after that is due by December 31. Waiting until April for the first means taking two in the same calendar year, which can push you into a higher tax bracket.

The penalty

Miss an RMD, or take too little, and the shortfall "may be subject to an excise tax of 25%, 10% if the RMD is timely corrected within two years," per the IRS. The IRS can waive it if the shortfall came from a reasonable error that you're fixing.

Planning around them

RMDs can push your taxable income up just when your paycheck stops, and they can raise how much of your Social Security is taxed. A few common ways people manage them:

• Converting to Roth before RMD age. Converting part of a traditional balance in lower-income years, such as between retiring and starting Social Security, shrinks future RMDs. You pay the tax on the conversion now.
• Choosing which account to draw from first. Drawing from traditional accounts earlier, rather than leaving them until last, can even out taxable income over retirement.

Whether either helps depends on your tax brackets now and later; the calculators below show the trade-off for your numbers.

Try it

The RMD calculator shows this year's RMD and the ones that follow. The Roth conversion calculator shows what converting does to your RMDs and your lifetime taxes.