How Do Required Minimum Distributions Work?

By March 13, 2017Finances, Investing, Planning, RMD, Roth IRA


RMDs can sometimes be confusing. Here’s a FAQ-style blog post that walks you through the details.

What are Required Minimum Distributions?

Required Minimum Distributions, or RMDs, is an IRS rule that says a retirement account owner must annually withdraw a minimum amount from their accounts. This amount is taxed.

When do I start?

The age to know is 70 1/2. Once you hit this age, you are required to start taking this minimum withdrawal.

When do I need to withdraw by?

In the year you turn 70 1/2, you have until April 1st of the next calendar year to take your withdrawal. For example, if I turn 70 1/2 in March of 2017, I have until April 1st of 2018 to take my first (2017) RMD. Every year after, you must take the withdrawal by December 31st. One point to note is that if you waited until April 1st of the next year to take your first RMD, you still would need to take your 2nd RMD in that same year. So essentially you would be taking two RMDs in the same year. That’s important to know for tax purposes.

Which types of retirement plans require RMDs?

If you have a retirement plan where you have been deferring taxes, it’s likely on the list of places to take a RMD from. Below is a list.

  1. 401(k) plans
  2. 403(b) plans
  3. 457(b) plans
  4. Roth 401(k)
  5. SEPs
  6. SARSEPs
  7. Simple IRAs
  8. Traditional IRAs
  9. Profit sharing plans
  10. Other defined contribution plans

How do I calculate my RMD amount?

Divide the prior year’s December 31st balance of the retirement plan by a life expectancy factor. Those tables can be found at but wherever your money is being held is required to know the amount that you need to distribute. So check with them. If you wanted to double check or liked number crunching you would calculate as below.


Account balance as of 12/31 of previous year: $300,000

Distribution period based on age:  /25.6

RMD for that year: $300,000/25.6 = $11,718.75

What is the penalty for not taking the RMD by the deadline?

50% of the amount you were supposed to withdraw (but didn’t) is a penalty. Using the example above that would calculate out to $5,859.37. That’s a huge amount that can be easily avoided. Work with your advisor to get your RMDs taken out with plenty of time to spare. (No procrastinating!)

How are RMDs taxed?

Your RMD withdrawal is taxed at your ordinary income rate.

What about Spousal Beneficiaries when the account owner passes away? Do they need to take RMDs?

Spouses who are the sole designated beneficiary can:

  • Treat the account as their own. Roll the account into their own. (Example: IRA)
  • Base RMDs on their current age. Might be beneficial if the beneficiary is younger.
  • Base RMDs on the decedent’s age at death, reducing the distribution period by one each year.
  • Withdraw the entire account balance by the end of the 5th year following the owner’s death. (Taxes must be paid)
  • Roth IRAs require RMDs once the owner passes.

What about other beneficiaries? Do they need to take RMDs?

  • If RMDs had not yet begun by the original owner, you can withdraw the entire account balance by the end of the 5th year following the account owner’s death.
  • Calculate RMDs based on if the owner passed before or after RMDs began.
  • If owner died after RMDs began, the longer of the:
    • beneficiary’s remaining life expectancy or
    • owner’s remaining life expectancy at death, reduced by one for each subsequent year
  • Roth IRAs require RMDs once the owner passes

Which account is the RMD taken from?

Amount for all accounts can be taken from a single IRA account. This is nice if you have certain accounts that you do not want to withdraw from.


There are a number of strategies you can use with your RMD withdrawals.

Spend & Enjoy It

You worked hard and saved your money for retirement and you are now retired. Is there a trip you would like to go on or a purchase you’ve been waiting to make? If it makes sense, then you can spend and enjoy your RMD.

Invest It

Maybe you are already spending and enjoying your retirement dollars. You can take the withdrawal and invest it in your regular taxable investment account. This way, it still remains a part of your portfolio and grows. You still have access to the dollars and can withdraw them at a later date when you need them.

Fund College for Grandchildren

Did you know a grandparent can deposit funds into a college plan for their grandkids? You can! The withdrawals aren’t tax exempt, but depending on certain states you may generate a state income tax benefit. It allows you to leave money for your grandchildren to help pay for education and the earnings are even tax exempt if they are used for education.

Donate to Charity

Lots of great organizations do really fantastic work and rely on the help of charitable donations to do their work. Is there an organization that does something you support? If so, you could take some or all of your RMD and donate it to charitable causes. In fact, you are eligible to do a tax-free transfer of your RMD to a charity. This only applies to IRAs but the benefit is that it keeps the RMD amount out of your adjusted gross income.

Legacy Planning

If the previous options don’t apply you may fall into the legacy planning category. If you have a pension, social security and other assets that already cover everything you need. You might consider using the funds to guarantee a higher amount that is left to heirs by using a guaranteed life insurance policy or an annuity with a death benefit rider.

Need help with your RMD decision?

Sometimes it can be really helpful to get some outside validation from an expert or perhaps some suggestions on how to do things better. If that’s the case, I make getting answers super easy, without having to talk to some high-pressure sales person. Just reach out using our secure, confidential contact form and I’ll get back to you via email within 48 hours to help point you in the right direction.

Take care,


Like this post? Share with your friends and family.

Work With John 

Your Retirement Won’t Fund Itself.

My mission is to help you turn your vision of the future into reality.

Join to learn how to plan for a successful retirement.