Qualified retirement plans—such as traditional 401(k)s, 403(b)s and IRAs—can help offer clear tax advantages. They offer a tax deferral on contributions and growth until distribution. And while this is beneficial for many, certain rules are in place to help prevent individuals from taking advantage of the tax-deferred growth in perpetuity.
One such rule requires taxpayers with qualified retirement accounts to begin taking distributions once a certain age is reached—known as required minimum distributions (RMDs). Let’s explore the basics of RMDs, how to calculate your RMD, and how to put these payments to work for you.
The Basics of RMDs
An RMD is the minimum amount that an account owner generally must withdraw annually beginning in the year you reach age 73 and is subject to ordinary income tax. RMDs generally apply to employer-sponsored qualified retirement accounts (401(k)s, 403(b)s, etc.) as well as SEP, SIMPLE, and traditional IRAs. They do not apply to Roth IRAs or Roth 401(k)s.
The RMD amount is calculated using life-expectancy tables provided by the IRS. The intent is to draw down tax-advantaged retirement accounts over the life of the taxpayer. As a result, the minimum distribution amount will change every year depending on the current age factor, the prior year’s distributions, and market performance.
Once you turn 73, your minimum distribution must be taken by December 31 each year to avoid penalty, with one exception. In the first year an RMD is required to be taken (the year of your 73rd birthday), that first distribution needs to be taken by April 1 of the following year. The second year’s RMD is still required to be taken that year, so this does result in two distributions in the second year if you decide to wait.
If you are still working at or beyond the RMD age and your company offers a qualified retirement plan such as a 401(k), the distribution requirement for that plan specifically is deferred until the year you retire or otherwise stop working for that company. If you own more than 5% of the company when you turn 73, you would still need to take RMDs from that company plan.
How to Calculate Your RMD Amount
As noted above, the minimum distribution is calculated by using a formula based on a life expectancy factor provided by the IRS. The factor is primarily based on age, but also the spouse’s age, if applicable. For most people, the Uniform Lifetime Table (Table III) is what provides the correct life expectancy factor.
To calculate the RMD, the balance of the applicable accounts on the last day of the prior tax year (December 31, 2025, for 2026 distributions) is divided by the life expectancy factor. While there is not a requirement to take distributions from every single account—i.e., a distribution from one IRA can suffice for all IRAs—there is a distinction between IRAs and employer-sponsored accounts. If you have IRAs and a 401(k), two pro rata distributions must be taken: one from an IRA to meet the RMD for the collective IRAs and one from the 401(k) to cover for the employer-sponsored plan(s).
For a simple example, assume you are 73, single or have a spouse the same age, and have $50,000 in a 401(k) and $50,000 in an IRA for a total of $100,000. Your life expectancy factor is 26.5. Divide $100,000 by 26.5, and your total RMD for the year is $3,774, and furthermore, at least $1,887 is required to be withdrawn from each account.
Always remember, the RMD is the minimum amount you must distribute. But you can withdraw more as needed.
How to Take the RMD
To take the distribution, you must direct the account custodian to make the distribution. There will be a form to fill out, which includes how much to withdraw, when to withdraw, how and where the distribution will be paid, and how much in taxes to withhold. The default federal tax withholding is 10%, but you can request specific amounts or percentages to be withheld for federal and state taxes.
Some custodians will allow you to set up automatic distributions, which can be helpful if you have multiple and/or smaller accounts to help ensure the RMD is not missed. This can be important, as failing to take the RMD could result in a 25% penalty on the minimum distribution not taken. (The penalty can be reduced to 10% if corrected in two years or less.)
For tax reporting purposes, you will get a 1099R that lists the distributions and taxes withheld. You should always provide this form to your tax preparer.
Choosing an RMD Strategy for You
In the first year, although you have a three-month grace period to delay until April 1, it generally makes sense to take the first RMD to reduce the overall tax liability. However, in certain circumstances, it could be worth considering a delay until the following year. As an example, if you are retiring this year with a sizeable severance package, or you expect to have significant gains (perhaps from the sale of property), it could make sense to defer the income to the following year. You would double up on your RMDs in the following year, but you could be paying less in taxes overall with proper planning.
A common planning strategy involves using RMDs as a vehicle to withhold taxes. Once you have a good idea of what your net tax liability will be for the year—typically in November or December—you can take your distribution and withhold the necessary taxes needed for the year. The custodian will then pay federal and state tax authorities and remit the balance to you. This is generally more attractive than making estimated tax payments during the year because the tax withheld from your RMD is considered as paid throughout the year and can reduce the chance of an underpayment penalty due to a timing mismatch between income and estimated payments.
There is no limit on the number of distributions you can make throughout the year, other than what your custodian may impose. You can take them yearly, monthly, or even bi-weekly if you wish. Additionally, there is no maximum distribution—other than the account balance, of course. If, for example, your RMD is $100,000, but you need $120,000 for living expenses, you can withdraw $120,000 or more to meet your needs. Perhaps a monthly distribution of $10,000 is more attractive. On top of those distributions, you could take a year-end distribution to cover the expected tax liability.
Consult with Your Advisors
Given the complexity of the RMD calculation and process, you should always consult with your financial planner and/or tax advisor to discuss how much to withdraw, how much to withhold, and when to take to the distributions as you near age 73 and beyond.
Michael Gruidel is a non-producing registered associate of Cetera Wealth Services LLC.
Cetera Wealth Services LLC, exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete. Limitations and Early Withdrawals: Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Retirement Plans: Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. Roth IRA: Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax-free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes. Annuities in an IRA: If you are purchasing an annuity to fund any tax-qualified retirement plan (IRA), you should be aware that this tax-deferral feature is available with any investment vehicle and is not unique to an annuity. Carefully consider the features and benefits of the annuity before making the decision to purchase.
Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty.
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