RMD Calculator

1. What is an RMD?

A Required Minimum Distribution (RMD) is the minimum amount the IRS requires you to withdraw from your retirement accounts each year once you reach a certain age. The purpose of RMDs is to ensure that individuals do not keep money in tax-deferred accounts indefinitely; the government wants to eventually collect the deferred income taxes on those savings.

RMD rules apply to most employer-sponsored retirement plans (like 401(k), 403(b), and 457(b) plans) and traditional IRAs, including SEP and SIMPLE IRAs. Notably, Roth IRAs do not require RMDs during the original owner's lifetime, though inherited Roth IRAs may be subject to them.

2. The SECURE Act 2.0 and New RMD Ages

The rules regarding when you must start taking RMDs have changed significantly in recent years due to the SECURE Act (2019) and the SECURE Act 2.0 (2022). Under the current law:

• If you were born before 1951, your RMD age was 70½ or 72.
• If you were born between 1951 and 1959, your RMD age is 73.
• If you were born in 1960 or later, your RMD age is 75.

Your first RMD must be taken by April 1 of the year following the year you reach the required age. However, taking your first RMD in that following year means you will have to take two RMDs in a single tax year, which could push you into a higher tax bracket.

3. How is the RMD Calculated?

The calculation for an RMD is relatively straightforward but requires specific data points:

RMD = (Account Balance as of Dec 31 of Previous Year) / (Distribution Period)

The Distribution Period is determined by the IRS based on your age and life expectancy. Most taxpayers use the Uniform Lifetime Table. If your spouse is more than 10 years younger than you and is the sole beneficiary of the account, you use the Joint Life and Last Survivor Expectancy Table, which results in a smaller RMD.

4. Penalties for Missing an RMD

The IRS takes RMDs very seriously. Historically, the penalty for failing to take the full amount of an RMD was a staggering 50% of the amount not withdrawn. The SECURE Act 2.0 reduced this penalty to 25%, and it can be further reduced to 10% if the error is corrected within a specific "correction window."

Despite the reduction, a 10% or 25% penalty is still a significant financial blow. It is crucial to track your RMD requirements across all your accounts to avoid these unnecessary costs.

5. Strategies to Manage RMDs

For many retirees, RMDs provide necessary income. However, for those who don't need the money, RMDs can create a tax burden. Here are a few strategies to manage them:

• Qualified Charitable Distributions (QCDs): If you are 70½ or older, you can donate up to $105,000 (indexed for inflation) directly from your IRA to a qualified charity. This amount counts toward your RMD but is not included in your adjusted gross income.
• Roth Conversions: Converting traditional IRA funds to a Roth IRA before you reach RMD age can reduce the total balance subject to future RMDs. You pay taxes now to avoid RMDs later.
• Qualified Longevity Annuity Contracts (QLACs): You can invest a portion of your retirement funds into a QLAC, which defers RMDs on those funds until as late as age 85.