When it comes to taxes, IRAs and 401(k) retirement accounts offer a pretty good deal. When you put some of your paycheck into those accounts, that money isn’t counted toward your taxable income.
And that’s not the only perk: your earnings on those accounts can grow without being reduced by taxes. You reduce your taxable income and increase your retirement savings while the Internal Revenue Service (IRS) sits idly by. What’s not to like?
But this great deal comes with an expiration date.
When you reach age 72, the IRS requires you to annually make a withdrawal from your tax-deferred retirement accounts. Please note, that prior to the passage of the SECURE Act, enacted on January 1, 2020, the beginning age for required minimum distributions (RMD) was 70 ½. When you take money out of a retirement account, you must pay income taxes on the amount you withdraw. RMD rules define how much you must take out, and when you need to make your withdrawal.
The RMD world can be complicated by calculations, variations and exceptions. It’s taxes, right? No one ever said it was going to be simple. But you’ve dealt with taxes your whole life, so with a little effort you can definitely handle this.
Why do RMDs exist?
If you’ve been setting aside part of your earnings in an IRA or 401(k) or other tax-advantaged retirement account, you haven’t paid income tax on those dollars. The government lets you delay paying taxes, but RMDs are how the government ensures you’ll eventually be taxed.
Which retirement accounts are subject to RMD rules?
According to the IRS rules, if you have any of these plans, you’re required to take annual RMDs:1
- 401(k), 403(b) and 457(b)
- Traditional IRAs, SEP and SARSEP
- SIMPLE IRAs and Roth 401(k) accounts
Any investment or savings accounts you fund with money you’ve already paid taxes on are not subject to RMD rules, like Roth IRAs.1
Withdrawal rules differ for IRAs and 401(k)s. If you have more than one IRA, you can total your IRA RMDs and, if you wish, withdraw that amount from just one account. For 401(k)s, a separate RMD must be calculated for and withdrawn from each of your 401(k) accounts.2
When do I need to start taking an RMD?
You must start taking RMDs when you turn 72 or continue to take RMDs if you reached age 70 ½ prior to January 1, 20201 There is one exception: people still on the job after age 72 usually may delay taking RMDs from their employer sponsored plan until they retire.2 You may want to check with the IRS or talk to a tax advisor for more details.
Your first required withdrawal doesn’t have to be made until April 1 of the year after you turn 72. After that first withdrawal, the IRS requires you to take RMDs by December 31 each year.