401k and Traditional IRA accounts are examples of tax-deferred accounts, meaning you pay tax at a later date.

How long can you defer taxes in a tax-deferred account?

Until you take distributions from the account.

If you take $10,000 from your Traditional IRA and transfer it to your checking account, the investment company issues a 1099R tax form to you and the IRS documenting the distribution.

Here is the thing that not everyone realizes…

At age 73, the IRS requires you to start taking Required Minimum Distributions (RMD) every year from your tax-deferred accounts.

There are exceptions, but this is the rule that most people are subject to and need to remember.

Why do RMDs exist?

Plenty of people tell me – “I don’t want to distribute this money! Why are they forcing me to?”

Tax-deferred accounts were created to help people save money for retirement – not to pass on wealth to the next generation.

You don’t get a lifetime of tax-deferred growth, but you get many, many years of tax-deferred growth before you need to start systematically distributing from these accounts.

Which accounts require an RMD?

• Traditional IRA

• SEP IRA

• Simple IRA

• 401(k)

• Thrift Savings Plan

• 403(b)

• 457(b)

• profit sharing plans

• other defined contribution plans

Roth 401ks and Roth IRAs do not require withdrawals until after the death of the account owner.

What if I have multiple accounts that are subject to an RMD?

You have to calculate the RMD for each account separately, but you may withdraw the total amount from a single account if you wish.

How do I calculate my RMD?

Your plan sponsor will calculate the RMD for you. Typically, your statement will list the RMD amount for the current year and the total distributions-to-date so you can confirm that you are on track with your distributions.

In general, you divide the market value of your account on 12/31 of the previous year by the appropriate life expectancy factor on the IRS Uniform Lifetime Table. If your spouse is your sole beneficiary and is more than 10 years younger than you, you need to use a different table. Here is the IRS site with the details and worksheets. There are many online RMD calculators available as well which I highly recommend as a double check.

When do I have to take my first RMD?

Your first RMD must be taken by 4/1 in the year after you turn 73. After that first year, which has a bit of a grace period, you must distribute RMDs by 12/31 (no grace period).

What is the penalty if I fail to take out the appropriate amount?

The required amount not withdrawn is subject to a 25% penalty (or 10% if you meet certain requirements).

What should I do with the money?

Here are your options:

Use it to pay for living expenses.

If you are retired and distributing from your portfolio, using the RMDs to cover your expenses may make sense.  

Transfer it in-kind to your brokerage account.

For people who don’t need the money yet, such as those who inherited an IRA subject to RMDs but are still working, you can transfer shares equivalent to the RMD amount to a Brokerage account. That allows you to satisfy the RMD but keep the money invested.

Utilize the QCD strategy

If you are subject to RMDs and giving to charity, you can transfer the RMD amount directly from a traditional IRA to a qualified charity. While an RMD is typically taxable income, when you execute a QCD, it is excluded from taxable income. It gives you the same benefit as if you took a taxable distribution from your IRA, gave the money to charity, and then deducted the donation. The limit on QCDs is $100,000 in 2024. Here is more information at the IRS site and be sure to consult with your tax person before implementing this strategy.

originally published 4/23/2019

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.