If you’ve spent years building up your retirement savings in tax-deferred accounts like IRAs or 401(k)s, there comes a point when the IRS steps in and says, “Okay, it’s time to start withdrawing.” That’s where Required Minimum Distributions, or RMDs, come in.
Learning how RMDs work—and how to calculate them—can keep you out of hot water with steep penalties and let you keep more of your hard-earned money in retirement. So let’s make it easy.
What are RMDs, exactly?
RMDs are the minimum amount of money you must withdraw annually from most retirement accounts once you’ve reached a certain age. There are no such rules for Roth IRAs (which you fund with after-tax dollars), but there are for accounts like:
- Traditional IRAs
- 401(k)s
- 403(b)s
- Other workplace retirement plans
Why does the IRS do it? Because the money in those accounts has been tax-free for decades. When you withdraw it, it’s taxed as income.
When Do RMDs Start?
The laws have shifted in recent years, so it’s nice to know the timeline:
- Before 2020, RMDs started at age 70½.
- The SECURE Act of 2020 set it at age 72.
- SECURE 2.0 Act of 2023 moved it again, and RMDs currently start at age 73.
- Beginning in 2033, the RMD age will move to 75.
This is the key thing to know: you don’t have to take your first RMD at age 73. Instead, you can take it by April 1 of the following year. But beware—if you delay the first one, you’ll have to take the second RMD in the same tax year. That might mean a bigger tax bill.
How are RMDs calculated?
The IRS doesn’t just pull a number out of thin air. There’s a formula:
- Look at your account balance on December 31 of the previous year.
- Find your life expectancy factor, which the IRS publishes in special tables. For most people, this is based on age and assumes how many more years you’re expected to live.
- Divide your balance by that factor.
- The result is your RMD for the year.
A real-life example
Assume you reached 73 in 2024, and your balance in your traditional IRA was $250,000 at the end of 2023. According to the IRS life expectancy tables, your factor at age 73 is around 26.5.
Here’s the calculation:
$250,000 ÷ 26.5 = $9,433.96
That would mean your 2024 required withdrawal would be roughly $9,500. If your account increases over time, your subsequent RMDs will probably grow as well.
Why calculating RMDs matters
Having an RMD can be costly. The penalty used to be a whopping 50% of what you’re really supposed to take out, but under SECURE 2.0, it’s now 25% (and as low as 10% if you catch the mistake in a timely manner). Either way, that’s money you’d prefer not to hand over to the IRS.
Planning ahead has other benefits as well. For example:
- If you don’t require the funds to live on, withdrawals might be spent on philanthropy.
- Strategic management of RMDs can reduce estate taxes your heirs would owe.
- Understanding how much you’ll be withdrawing will help you make informed retirement investment decisions.
Easy tools to help
While you technically can do the math by hand with the IRS tables, most retirees don’t. There are online calculators that can be used. Plug in your age and account balance, and you’ll get an estimate in seconds. Just remember: if you have more than one IRA, you must calculate each individually by its own balance and factor.
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The bottom line
RMDs are more than just another piece of financial jargon—there’s a real requirement with serious tax consequences if you’re not careful. Fortunately, they’re not rocket science. Some planning (and maybe some guidance from a financial advisor) can keep you in step with your withdrawals, avoid penalties, and get your retirement funds to do what you want them to.
