If you’re entering retirement, it’s essential to understand how required minimum distributions, or RMDs, work.
Tax-deferred accounts are subject to RMDs. That means the account holder must take a set amount of money from retirement accounts. However, RMDs are not required for Roth IRA, Roth 4301(k), and Roth 403(b) accounts for original owners.
So that there’s no confusion, or visits from your friendly neighborhood IRS agent, consult with an advisor before calculating.
Unless, of course, you’re a seasoned pro.
No. 1: Secure 2.0 Increased the RMD Age to 73
When we refer to Secure 2.0, we’re referring to legislation passed in late 2022 to expand retirement savings options. All of which helps make it easier for Americans to save by implementing features like automatic enrollment for new plans, adding penalty-free emergency withdrawals, and raising the age for Required Minimum Distributions (RMDs). It also aims to strengthen retirement security through enhanced catch-up contributions for older workers.
Under the new rules, if you were born before July 1, 1949, your RMD starts at the age of 70.5. If you were born between July 1, 1949, and December 31, 1950, you must pull by 72. If you were born between January 1, 1951, and December 31, 1959, the age to pull RMD is 73.
The goal is to give retirement savers more time for their money to compound before they’re forced to withdraw funds.
No. 2: The RMD Aggregation Rules: Where You Can (and Can’t) Combine
To avoid severe IRS penalties, you must understand how different accounts interact when satisfying your RMD. For Traditional IRAs (including SEP and SIMPLE IRAs), you must calculate the RMD for each account separately, but you can total the amounts and withdraw the entire sum from a single IRA or distribute it across them. A similar aggregation rule applies to 403(b) plans, allowing you to total the distributions and withdraw from a single 403(b) account. However, no aggregation is allowed for 401(k) and 457(b) plans; you must calculate and withdraw the specific RMD from each individual employer plan separately. Furthermore, you cannot mix or combine RMDs for accounts you inherited from different individuals.
No. 3: Secure 2.0 Reduces RMD Penalty
Under the previous rules, missing an RMD resulted in a 50% penalty on the amount that should have been withdrawn. Now, it’s been reduced to 25%, which gives retirees more breathing room should they happen to miss an RMD.
In fact, according to the Internal Revenue Service, “If an account owner fails to withdraw the full amount of the RMD by the due date, the amount not withdrawn may be subject to an excise tax of 25%, 10% if the RMD is timely corrected within two years.”
No. 4: New Changes to RMD for Some Inherited Accounts
Secure 2.0 also modifies the rules for inherited IRAs and retirement plans. Under the Secure Act of 2019, non-spouse beneficiaries were required to deplete inherited retirement accounts within 10 years of the account holder’s death. SECURE 2.0 still has this rule but clarifies guidelines for designated beneficiaries depending on when the account owner passed away. Eligible designated beneficiaries, such as spouses, the chronically ill or disabled, or individuals within 10 years of the owner’s age, can still stretch distributions over their single life expectancy. However, adult children and other designated beneficiaries face strict variations of the 10-year rule. If the owner passed away before their Required Beginning Date, the heir must empty the account entirely by December 31 of the 10th anniversary year, with no annual interim RMDs required. If the owner passed away on or after their Required Beginning Date, the beneficiary must take annual RMDs in years one through nine based on life expectancy, in addition to completely draining the account by the tenth year.
Further information on this topic can be found on this IRS page.
No. 5: Secure 2.0 Increases Catch-Up Contributions
Starting January 1, 2025, individuals ages 60 to 63 can make enhanced catch-up contributions up to $11,250 a year to a workplace plan, replacing the standard catch-up limit. The catch-up amount for people ages 50 and older is $7,500, but do go over that with a financial advisor.
In addition, if you earn more than $150,000 in the prior calendar year, all catch-up contributions to a workplace plan at age 50 or older will need to be made to a Roth account in after-tax dollars. Individuals earning $150,000 or less, adjusted for inflation going forward, will be exempt from the Roth requirement.
No. 6: Neutralize the RMD Tax Shock with a QCD
Because RMDs from traditional accounts are taxed as ordinary income, they can inadvertently push you into a higher tax bracket or increase your Medicare premium exposure. If you do not need the RMD income for living expenses, you can utilize a Qualified Charitable Distribution (QCD). If you are age 70½ or older, you can transfer up to $111,000 directly from your IRA to an eligible charity. This transfer satisfies your annual RMD obligation either partially or entirely, and the distributed amount is completely excluded from your adjusted gross income. Furthermore, SECURE 2.0 allows a one-time gift of up to $55,000 of your QCD limit to be used to fund a Charitable Remainder Trust or a Charitable Gift Annuity.
Here’s How to Figure Out Your RMD
It’s also important to know how to calculate your required minimum distribution, which you should discuss with your financial advisor.
The IRS uses a formula that includes your total account balances. It also includes your age, your life expectancy, and your beneficiary’s life expectancy.
The agency then divides the total balance by your life expectancy factor, which is the age to which you’re expected to live from your current age. For an example of how that works, here’s a link to the IRS Uniform Lifetime Table.
Even more information on RMD can be found on this IRS page.
If you’d rather avoid the IRS page, here’s how the calculation works.
Let’s say you’re 73 years old. You would have a Life Expectancy Factor of 26.5. If you have an account balance of $250,000 as of December 31 of last year, you would divide $250,000 by 26.5, which would give you your RMD of $9,433.96.
Again, be sure to check with your financial advisor.
Editor’s Note: This article has been updated to incorporate the indexed workplace enhanced catch-up contribution limit of $11,250 for individuals aged 60 to 63 and the adjusted $150,000 prior-year earnings threshold for the high-earner Roth contribution mandate. It also features a new section clarifying account aggregation rules across traditional IRAs, 403(b) plans, and employer 401(k) structures. Additionally, details have been added expanding on interim RMD requirements for inherited IRAs based on the original owner’s date of death, alongside a newly introduced tax mitigation section highlighting the mechanics and updated limits of Qualified Charitable Distributions.
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