Getting ready to take your RMD

Read time: 3 minutes

As you get closer to age 73 and retirement, you’ve probably heard about required minimum distributions (RMDs). You may have also wondered how RMDs will affect you and your retirement savings. If you’re familiar with the basics of RMDs, now is the time to start planning for them. This article provides helpful information and tips to get you started.

Let’s start with a quick recap

RMDs are a specific amount of money the IRS requires you to take out of your retirement plan accounts every year.* And if you have multiple retirement plans, in most cases you’ll have to take an RMD from each one of them.

You’re required to take an RMD from the following types of accounts:

Employer-sponsored retirement plans such as profit-sharing, 401(k), 403(b),** and 457(b) plans.
Individual retirement accounts such as traditional, SEP, SARSEP, and SIMPLE IRAs.

DID YOU KNOW?

Starting January 1, 2024, Roth 401(k) after-tax accounts won't be subject to RMDs. So money taken from your Roth account won’t count toward your RMD.

A few things to consider before taking your RMD

Timing your RMD

Starting to take your RMD at the right time is important, to avoid any tax penalties. In most cases, you’ll start taking an RMD when you meet one of the following requirements**:

You reach age 73 and stop working.
You’re still working past age 73 and have an account in a previous employer’s retirement plan.
You reach age 73 and have an ownership stake or voting rights larger than 5% in the business that sponsors your current employer’s retirement plan.

There may be some exceptions, so you’ll want to consult with a tax professional.

You have the choice to defer, or put off receiving, your first RMD until April 1 of the year after you’re required to take your first RMD. While this option allows your savings to stay in your account and potentially grow, it also means you’ll need to take 2 RMD payments in the same year. This could move you into a higher tax bracket.

TIP: KEEP TRACK OF DEADLINES

If you miss taking an RMD for the year, you may have to pay a penalty of 25% of the amount that was due. Plus, you’ll have to take the full RMD and pay taxes on it. By paying close attention to your RMD date, you can avoid paying any penalties.

While the IRS may reduce the penalty to 10% if you fix your error quickly, it’s better to avoid the problem altogether.

Taking the correct amount

It’s important to take the correct RMD amount every year. Your annual RMD amount is calculated by dividing your plan account balance at the end of the previous year by your life expectancy factor. This factor can be found in one of the following IRS tables:

Uniform Lifetime Table. This is the default table for calculating RMDs.
Joint and Last Survivor Table. This table can be used if your spouse is more than 10 years younger than you are and is your sole primary beneficiary. This generally results in a smaller RMD.

TIP: TAKE THE RIGHT AMOUNT

You’ll want to make sure you take out enough money each year, so you don’t have to pay a penalty. Also, while your plan may allow you to take more than your RMD amount in one year, that extra amount won’t apply to next year’s RMD. It could also put you in a higher tax bracket for the year you take it.

Taxes on your RMD

RMDs are considered taxable income, which means you’ll pay taxes on them. The IRS considers RMDs income because the contributions to your employer’s retirement plan were made with pre-tax dollars.

TIP: INCLUDE YOUR RMD IN YOUR TAX PLANNING

If you’re not familiar with the relationship between RMDs and taxes, you could end up paying more taxes than you need to. This is especially true if you defer your first-year RMD. So you’ll want to pay close attention to how your RMD could affect your personal tax situation, and speak to a tax professional if you have any questions.

RMDs and multiple retirement plan accounts

If you have multiple employer-sponsored retirement plan accounts, you’ll need to take an RMD from each of them. If your spouse also has multiple employer plan accounts, they’ll have to take an RMD from each of their own accounts as well.

TIP: RMDS CAN’T BE COMBINED FROM MULTIPLE PLANS

Unlike with IRAs, the RMDs from your retirement plans can’t be combined and the money taken from one account.

For example, if you have 2 retirement plan accounts and you’re required to take $1,200 from Plan A and $800 from Plan B. You won’t be able to take the full $2,000 from just Plan A or Plan B. That’s because you could end up taking too much from one account and not enough from the other.

Also, you and your spouse can’t combine your RMDs and take them both together in one payment, even if you file a joint tax return.

What can you do with your RMD payment?

Once the RMD comes out of your account(s), you can use the money for whatever you want. You can spend it on living expenses such as housing, food, or travel. You can also invest the money in a taxable account, like a brokerage account for stocks or bonds, mutual funds, or ETFs.

TIP: AVOID ROLLING YOUR RMD INTO A TAX-DEFERRED ACCOUNT

The IRS won’t let you roll your RMD into a tax-deferred account, like an IRA. You also won’t be able to make a qualified charitable distribution (QCD) from your employer plan account. While QCDs can come from IRAs and are a great way to make tax-free donations directly to charity, they can’t come from employer-sponsored retirement accounts like 401(k)s.

Remember these tips when choosing your RMD options

Consider monthly distributions. If you need your RMD for daily living expenses, a monthly distribution acts like a regular “paycheck” you can count on.
Take your first RMD by the deadline. By not deferring your first RMD to the next year, you may avoid moving into a higher tax bracket.
Put time on your side. If you don’t need monthly withdrawals, try receiving your RMD payments later in the year. This will give your money the chance to continue growing in your account(s).
Increase your federal taxes. If you don’t need your RMD and you have other taxable income sources, consider withholding more federal taxes from your RMD. This extra amount could help pay down your overall tax bill.
Ask for help. If you have a complex financial situation, consult with a tax advisor to help minimize your taxes and make the most of your RMD.

What can I do now?

Once you’re ready to take your RMD, Vanguard can help you through the process. Depending on your plan options, we can even calculate your RMD and send it to you each year—so you won’t need to worry about missing a deadline. Then you can focus on enjoying your retirement.

*In most cases, you’ll need to start taking RMDs at age 72 if you reached that age before 2023.

**If you have a 403(b) plan that is managed by multiple vendors, you can take your RMD from just one of those vendors.