Saving money in an IRA or 401(k) is one of the best ways to prepare financially for retirement. 

These investment accounts can offer tax benefits, including deferral of taxes on funds contributed to traditional IRAs and 401(k)s. 

But there’s a provision in IRAs and 401(k)s that can trip up unsuspecting retirees. Known as required minimum distributions (RMDs), this requires retirees to start withdrawing money and paying taxes on these withdrawals when they reach a certain age. 

What is a required minimum distribution (RMD)? 

The RMD rule is fairly simple. When you reach a certain age – 73 (72 if you reached age 72 before Dec. 31, 2022) – you must start withdrawing a minimum amount of money from certain tax-advantaged retirement plans. 

The required amount is based on your account balance at the end of the previous year, divided by the applicable distribution period or an age-based life expectancy factor to arrive at your RMD. 

Just like all funds withdrawn from qualified retirement accounts, RMDs are generally considered taxable income. Therefore, taking RMDs typically results in higher reported income on your tax return and, thus, higher income taxes during the year they are taken. 

The penalties for failing to comply with RMD provisions for IRAs and 401(k)s are steep. If you don’t take RMDs when you’re supposed to, you could be penalized 50 percent of the amount of the distribution that should have been taken. Provisions of the Secure 2.0 Act reduce that penalty to 25% effective for tax years after 2022, and further to 10%, if the shortfall is timely corrected.  

Which retirement plans do RMD rules apply to? 

RMD rules generally apply to pre-tax retirement accounts, meaning those for which you received a tax deduction for your contributions.1 Applicable retirement plans include: 

• 401(k) plans 

• 403(b) plans 

• 457(b) plans 

• Traditional IRAs 

• SEP IRAs 

• SIMPLE IRAs 

• Profit-sharing plans 

• Other defined contribution plans 

RMDs apply to the original account owner and any beneficiaries who may inherit one of these types of accounts. The RMD rules also apply to inherited Roth IRAs, even though they don’t apply to the original account owner. 

RMD rules have previously applied to Roth 401(k) plans, but only up until the end of 2023. Starting in 2024, all Roth accounts — including Roth 401(k) plans — are exempt from RMDs for the owner, but not for beneficiaries who may inherit one. 

How do I calculate my required minimum distributions? 

To calculate the amount of your RMD, you will divide the account balance on the prior December 31 by your life expectancy factor. The IRS has published life expectancy tables you can use for this purpose.3 

There are three different life expectancy tables. Use the one that applies to your situation: 

• If you inherited an IRA, use the Single Life Expectancy table (Table I) 

• If you’re married, the sole beneficiary of your account is your spouse, and if he or she is more than 10 years younger than you, you use the Joint and Last Survivor table (Table II) 

• All other original IRA owners use the Uniform Lifetime table (Table III) 

RMD calculation example 

Suppose Jane, a 75-year-old woman, is trying to calculate her RMDs for 2024. Jane ended the previous year with a 401(k) balance of $500,000. Based on the appropriate RMD table — the Uniform Lifetime table — Jane’s distribution period is 24.6. 

Once Jane has found her distribution period, she should divide her account balance by that number. When she divides her account balance of $500,000 by her distribution period of 24.6, Jane finds that her RMD for 2024 is $20,325.20. 

Additionally, online calculators can help run the numbers for you to find your RMDs. For example, see the Investor.gov Required Minimum Distribution Calculator. 

Special considerations for calculating RMDs 

Your marital status and whether you’re the original owner of the retirement account will impact the RMD table you’ll use and, therefore, your RMD for each year. Most account holders will use the Uniform Table, Table III. That table applies to: 

• Unmarried owners 

• Married owners whose spouses aren’t more than 10 years younger 

• Married owners whose spouses aren’t the sole beneficiaries of their IRAs 

RMD Uniform Lifetime table 2024 

If you don’t fall into one of the categories for table III, you’ll use one of the other tables. For example, you’ll use Table II if you’re an owner whose spouse is more than 10 years younger and is the sole beneficiary of your IRA. You’ll use Table I if you’re an account beneficiary. 

If you inherit a traditional IRA and the original owner had started taking RMDs at the time of death, you must continue to receive the distributions as previously calculated during the year of the original owner’s death. After this, the amount of your RMD will depend on your status as a beneficiary (e.g., a surviving spouse or minor child). 

One rule change in 2022 for inherited IRAs is that the IRS included a transition rule for non-spouse beneficiaries who inherited an IRA prior to January 1, 2022, after RMDs have begun, and are using the Single Life Table. The transition rule has the life expectancies “reset” using the new tables. 

Known as the 10-year rule under provisions of the Secure Act, beneficiaries of inherited retirement accounts may also be required to fully distribute assets from the account by the 10th year after the owner’s year of death depending on relationship to the original owner. 

This “reset” will look like this: The beneficiary will “go back” to the year after the owner’s death and find their single life expectancy as of their age in that year using the new table. Then, one year will be deducted from the new life expectancy for each year since the first distribution year to get the divisor for the relevant post-2021 year. 

This can be complex as there are different rules for different years. Talk to your financial advisor and tax planning professional about your RMDs. 

RMD penalties 

If you fail to withdraw the RMD by the applicable deadline, or the distributions are not large enough there can be a penalty. For every dollar not withdrawn, the Internal Revenue Service (IRS) will charge a 25% penalty, known as an excise tax.2 If you correct your error within two years, the IRS may reduce the penalty to 10% for IRAs. The penalty may be waived if the account owner establishes that the shortfall in distributions was due to a reasonable error and that reasonable steps are being taken to remedy the shortfall. 

The bottom line 

Retirement accounts like 401(k)s and IRAs have plenty of advantages, including their upfront tax savings and the ability to enjoy tax-deferred potential investment growth for decades. But eventually, those taxes will come due. And despite whether you need to access the funds at the age of 73 or not, the IRS will require that you start taking — and paying income taxes on — distributions. 

If you’ve inherited a retirement plan or have a retirement plan and are nearing age 73, it’s important to understand how much you’ll be required to withdraw and how to go about taking those distributions. If you aren’t sure where to get started, consider enlisting the help of a financial professional.