Photo of a man talking with his son about required minimum distributions.

The ABCs of RMDs

"RMDs" is a term that’s used a lot in retirement planning, especially as you start getting closer to retirement age. It stands for Required Minimum Distributions.

What are RMDs?

After you reach age 72 and are no longer working*, the IRS requires you to distribute some of your retirement savings each year from qualified retirement accounts like 401(k)s, 403(b)s and most IRAs.

You have to take out a certain amount from your account every year, although you can choose to take out more if you want. Just like a normal distribution, you may have to pay federal (and possibly state) taxes on the money you withdraw.

Withdrawing less than your RMD, or missing the deadline, can lead to a tax penalty of up to 50% of the amount you were supposed to withdraw, so you’ll want to stay on top of it.

How much to withdraw

In true IRS fashion, it’s a bit complicated. You divide the December 31 balance of each account by your life expectancy (as estimated by IRS life expectancy tables). The IRS provides worksheets to help with the calculation.

As you get older and your life expectancy decreases, your RMDs will increase. At age 90, for instance, you’ll need to withdraw almost 10% of your account’s value.

The good news is that most financial institutions calculate your RMD for you. But ultimately, you’re responsible for withdrawing the correct amount.

You also don’t have to spend your RMD money. You can re-invest it once it’s been withdrawn and taxed. (You just can’t roll your RMD into another tax-deferred account or a Roth IRA.)

When to take your RMD

Starting in 2020, the age for required minimum distributions (for retirees) increased from 70½ to 72. If you turned 70½ in 2019 you must take the RMD for 2019 by April 1, 20201, and your 2020 RMD by December 31, 2020. If you turn 70½ in 2020 or later, you will not need to take a distribution until you reach 72. You can read more about other recent updates that may impact your retirement savings.

Still working at age 72? As long as you don’t own more than 5% of the business, you can wait to start RMDs until April 1 following the year you retire.

For the year 2020, taxpayers may have the option to not take an RMD from certain eligible retirement plans and IRAs. You can read more about this and other recent provisions under the CARES Act.

Resources to help

Not sure where to start? Talk to a financial professional. He or she can help you figure out when to take your RMDs each year and how much to withdraw, based on your personal situation and finances.

You can also visit the IRS website’s RMD page for helpful information and resources.

Ready to get started?

  • Looking for estimates? Start visualizing retirement with your own info by visiting our planning tools and calculators.
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  • Interested in starting an individual retirement account (IRA) or consolidating other accounts into your existing one? Call 800-247-8000, ext. 2503 between 7 a.m. and 9 p.m. CT. Not familiar with IRAs? Here’s a refresher.
  • Got a financial professional? They can help you figure out your next steps. If you’d like to meet with one face-to-face, we’ll help you find one.

1 Subject to certain limited exceptions provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

*Participants who are considered 5% owners must begin receiving RMDs for the calendar year in which they attain age 72 without regard to their employment status.

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