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If you have a traditional IRA or 401(k), required minimum distributions or RMDs are a fact of life.
They kick in when you turn 73, requiring you to withdraw a certain amount of money from your account each year.
After all, the Internal Revenue Service wants to get paid for all that tax-deferred income you benefited from during your working years, and RMDs are how they do it.
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While the IRS is a fan of RMDs, many retirees are not. RMDs are treated as ordinary income and may push you into a higher income bracket. Plus, if you withdraw them during a down market, it can impact your retirement savings later on.
RMDs also force retirees to spend a portion of their income, something many tend to resist. And if you forget to take RMDs, you could face a penalty of as much as 25%.
As a result, it’s important to withdraw the correct amount each year. Take out too little, and you could be in trouble with the IRS. Withdraw too much, and it can drain your retirement account prematurely.
The stakes only get higher as your nest egg gets larger. Here’s how much you need to withdraw if you have $5 million saved across different ages.
Calculating your RMDs
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When calculating your RMDs, the formula takes into account your account balance and life expectancy factor. You obtain the latter from the IRS’s Uniform Life Table, which is the go-to chart that the vast majority of retirees are required to use, regardless of their actual health status.
The life expectancy factor takes into account actuarial data that re-estimates your remaining lifespan with every birthday you celebrate
The formula is the following:
Account Balance/Life Expectancy Factor = RMD
Your RMDs aren’t static and will change as you age. The older you get, the lower your life expectancy factor is and the more you have to pay in RMDs.
Because the government assumes you have less time left to spend your wealth, they force you to withdraw a larger percentage of your remaining savings with each passing year. Remember, the IRS wants to get paid!
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|
Age |
Life Expectancy Factor |
RMD |
|
73 |
26.5 |
$188,680 |
|
75 |
24.6 |
$203,252 |
|
80 |
20.2 |
$247,525 |
|
85 |
16 |
$312,500 |
The tax impact
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For savers with big nest eggs, RMDs can prove particularly problematic because of the tax treatment. If you are required to withdraw $203,252 in one year because you have a $5 million IRA, it could trigger a sizable tax bill.
While you can’t avoid the taxes altogether, you can employ strategies to lower the burden. For instance, you can convert some of the money into a Roth IRA in low tax years. With a Roth IRA, you aren’t required to take RMDs.
Or you can begin taking withdrawals prior to age 73 to lower your total balance and prevent a bump up in your income tax bracket. A financial adviser can help you devise a strategy in which your higher growth assets are in a Roth IRA, and your conservative investments are in a traditional retirement account.
If you are charitably inclined, you can use a Qualified Charitable Distribution to direct up to $111,000 (in 2026) of your IRA RMDs to a charity of your choice.
You can’t avoid RMDs, but you can plan ahead
You can’t avoid RMDs, but you can mitigate the potential hit. But to do that, you have to know what you will be on tap for ahead of time.
If you are a saver with a big nest egg, planning and preparation are key to navigating the world of RMDs.