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You’ll need to pay taxes on the pre-tax money in your retirement plan. But how and when will you pay those taxes? That’s where required minimum distributions (RMDs) come in. Learn the basics of how this required withdrawal can affect you and your retirement income
If you’re contributing pre-tax money to your retirement plan, you’ll need to pay taxes on your savings at some point. But how and when will you pay those taxes?
It’s time to learn the basics of required minimum distributions (RMDs).
RMDs are a specific amount of money the IRS requires you to take out of your retirement plan accounts every year. This ensures you pay taxes on your pre-tax savings.
You’ll need to take RMDs from the following 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.
When do I need to start taking RMDs?
In most cases, you must start taking RMDs by December 31 of the year in which you’re age 73 and have stopped working. After that, you’ll need to take an RMD by December 31 each year.
If you’re still working past age 73, you may generally postpone taking RMDs from your current employer’s retirement plan. But you'll need to take an RMD from any previous employer's plans you have.
Do you have an ownership stake or voting rights larger than 5% in the business that sponsors your current retirement plan? If yes, then you’ll need to take an RMD once you reach age 73, even if you’re still working. There may be some exceptions, so you’ll want to consult with a tax professional.
Can I wait to take my RMD?
You can choose to defer, or hold off receiving your first RMD payment, until April 1 of the following year. For example, if you defer your first RMD in 2023, you have until April 1, 2024, to get your payment.
That’s a good option if you don’t need your money right away. But you’ll still need to take your 2024 RMD by December 31 of that same year, which means you’ll get 2 payments. This could put you in a higher tax bracket. Talk with a tax professional to see what works best for you.
How is an RMD calculated?
Your annual RMD amount is found by dividing your plan account balance at the end of the previous year by your life expectancy factor. Generally, this factor comes from 1 of 2 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.
A surviving spouse who is also a sole beneficiary may elect to use the Single Life Table. This could result in a smaller RMD. Speak to a tax professional to see if this election is right for you.
What if you didn’t take your RMD because of an error? Depending upon the circumstances, the IRS may lower the penalty to 10% if you take the missed amount in a timely manner.
What can I do now?
If you have time before you need to take an RMD, learn all you can about them by checking out the related articles below. It’s important to get them right, so you avoid paying any penalties or extra taxes.
Once you’re ready to take your RMD, we’ll calculate the amount for you. And, depending on your plan, we can even automatically set up your RMD using popular payment options and send it to you each year. You’ll be confident knowing Vanguard is with you every step of the way.
If you’re close to taking your RMD, be sure to check out Getting ready to take your RMD. It goes into greater detail and offers more info to help you set up your RMD.
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*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.