retirement planning  |  december 8, 2022

5 Important Things You Should Know About RMDs

Once you turn age 72, you will need to take required minimum distributions (RMDs) from most retirement accounts, whether you need the money or not.

 

Key Insights

  • For IRAs, you must take your first RMD by April 1 (April 3 in 2023)* of the year after you turn age 72, regardless of whether or not you are retired. For each year after turning age 72, you must take an RMD by December 31.

  • If you have multiple individual retirement accounts (IRAs), you must calculate the appropriate RMD for each one. The total amount can be taken from one or more IRAs to satisfy the distribution—as long as the total RMD amount is withdrawn.

  • If you have multiple prior employer retirement accounts (such as 401(k)s), you will have to contact your prior employer to calculate the RMD and send you a distribution.

  • Once the RMD is distributed, you don’t have to spend it, but it cannot remain in a tax-deferred account.

Judith Ward, CFP®

Thought Leadership Director

Generally, beginning at age 72, retirement account holders are required to take RMDs from their tax-deferred retirement accounts. These include Traditional, Rollover, SEP, and SIMPLE IRAs and employer-sponsored retirement plans. You must pay federal, and sometimes state, income taxes on the taxable amounts of these distributions.

“RMDs aren’t optional,” says Judith Ward, CFP®, a thought leadership director with T. Rowe Price. “If you don’t take your RMD, or take out too little, you may be faced with an IRS penalty tax of 50% of the amount not distributed.”

Below are five things you should know about RMDs:

1. When Do I Need to Take My RMD?

For IRAs, you must take your first RMD by April 1 of the year after you turn age 72 (April 3 in 2023), regardless of whether or not you are retired. Your second RMD must be taken by December 31 of that same year. And each year thereafter, you must take your RMD by December 31.

“The distribution can be taken in one lump sum or spread throughout the year as long as the RMD amount is distributed by the due date,” Ward says. “Many IRA holders who spend their RMDs prefer to take monthly distributions.”

These distributions are generally included in your taxable income. Any distributions made through December 31 will be taxed in the current year. For this reason, many IRA holders choose to take their first distribution by December 31 of the year they turn age 72.

First IRA RMD Example:

Mary turns age 72 in September 2022. She can take her first RMD (based on 12/31/21 IRA balances) by December 31, 2022, and include it in her 2022 taxable income. Or Mary can wait until April 1 of 2023 to take her first RMD. Her second RMD (based on 12/31/22 IRA balances) needs to be taken by December 31, 2023. In this example, if Mary takes the two distributions in 2023, both will be included in her taxable income for 2023.

Required beginning dates for RMDs from an employer plan vary depending on plan rules. You might not be required to take your first RMD until the later of April 1 of the year after you reach age 72 or the year you retire from work with that employer. Please note that you must take each RMD for a qualified employer-sponsored plan from that plan. You may not take the amount from an IRA.

2. Which Accounts Require Distributions?

The most commonly affected accounts that require RMDs include:

Accounts Requiring Distributions
IRAs* Employer-Sponsored Retirement Plans*
Traditional 401(k)
Rollover 403(b)
SEP Governmental section 457 deferred compensation
SIMPLE SIMPLE 401(k)

*Roth IRAs don’t require RMDs for the account owner, while Roth plan contributions do.

If you’re working at age 72 and have assets in an employer-sponsored retirement plan at your current job, you may be able to delay taking distributions from that account until April 3 of the year after you retire.

3. How Do I Calculate My RMD?

You need to calculate your RMD each year because it is based on your current age and account balance at the prior year-end.

For IRAs, the account owner is responsible for calculating and taking RMDs. To help with this, you can use IRS Publication 590-B and reference Appendix A: Worksheet for Determining RMDs. (Also, see the "Simplify Your RMDs" sidebar.)

The employer is responsible for determining the RMD amount from qualified employer plans (e.g., 401(k)s) and distributing the RMD.

4. I Have Multiple IRAs. How Many RMDs Do I Need to Take?

If you have multiple IRAs, you must calculate the appropriate RMD for each one. However, the total distribution amount can be taken from one or more IRAs to satisfy the distribution as long as the total RMD amount is withdrawn. If you have three different IRAs, for example, you can take the entire RMD amount from just one account.

The 403(b) plan rules mirror IRA rules in that the total distribution from multiple 403(b) plans can be taken from one or more of the 403(b) accounts.

It’s different with 401(k) accounts. If you have multiple 401(k) accounts from prior jobs, each plan will calculate the RMD and send a distribution.

“Before age 72 is a great time to review your retirement account structure and consolidate the number of accounts when possible,” Ward says.

5. What If I Don’t Need to Spend My RMD Assets?

Once the RMD is distributed, you don’t have to spend it if you don’t need to, but it cannot remain in the tax-deferred retirement account. If you don’t wish to spend the distribution, you can:

  • Reinvest the money in a taxable general investing account, add it to your rainy day fund, or invest for the longer term.

  • Be charitable. Consider a qualified charitable distribution (QCD). Generally, you can distribute up to $100,000 directly from a Traditional IRA to qualified charities each year. QCDs can count toward your RMD and won’t be included in your taxable income.

  • Invest in your grandchild’s future by using the funds to contribute to a 529 college savings plan or add to one that’s already been established.

  • Help fund a Roth IRA. A Roth IRA may be a great way to instill the value of investing for a grandchild with earned income. The contribution limit for a Roth IRA in 2022 is the lesser of $6,000 or your grandchild’s total compensation for the year. If the grandchild is a minor, consider a custodial Roth IRA.

Simplify Your RMDs

It’s easier than ever to set up and manage your RMDs online with our two new and improved digital RMD tools.

As a valued client, once you reach the age that you must start taking RMDs from your eligible T. Rowe Price retirement accounts, you’ll receive access to log in and take advantage of these helpful tools.

Enhanced RMD Dashboard:

Find all the information you need to stay informed about your RMDs, including your total and remaining RMD amount for the year and a clear view of your RMD status—helping you see if you’re on or off track at a glance.

New Auto-RMD Tool:

Automate the distributions of your RMDs from each of your eligible accounts. Easily customize the dates, frequency, and details of your distributions.

Learn more about RMDs and understand your obligations.

*4/1/23 is a Saturday

Important Information

This material has been prepared by T. Rowe Price for general and educational purposes only. This material does not provide fiduciary recommendations concerning investments, nor is it intended to serve as the primary basis for investment decision-making. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.

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