Required minimum distributions (RMDs) — the minimum amounts that must be withdrawn from a retirement account each year once you reach the applicable age or other triggering event, can be easy to miscalculate. And the penalties for getting them wrong can be significant.
But the stakes go beyond penalties alone. How you time and structure your distributions can directly affect how much of your retirement income goes to taxes, which makes getting this right an important part of any retirement plan.
Here are five steps to help you get the math right to avoid unnecessary taxes and stay on track:
Step 1: Determine Your Distribution Year
The distribution year is the year for which you are taking a distribution, not necessarily the year in which you take it. You can delay your first RMD until April 1 of the year following the year you reach age 73 for many IRAs and retirement plans, though some employer plans have a still-working exception.
After that, subsequent distributions are generally due by December 31 of the year for which they are being taken.
One important wrinkle: if you take advantage of that April 1 delay for your first RMD, you will need to take a second RMD by December 31 of that same year. That means two taxable withdrawals in a single calendar year, which can push you into a higher bracket. Whether delaying makes sense for you will depend on your full income picture for both years.
Step 2: Find Your Retirement Plan Balance
Your starting point is the balance in your retirement account as of December 31 of the prior year, not the current balance on the day you run the calculation. If a rollover was still pending at year-end, the amount may need to be reflected in the prior-year balance before moving to the next step.
Step 3: Determine Your Life Expectancy Factor
IRA owners often use the IRS Uniform Lifetime Table to look up their life expectancy factor each year.
However, there is one exception: if your spouse is the sole beneficiary of your IRA for the entire year and is more than 10 years younger than you, you would use the Joint Life Expectancy Table instead, which produces a larger factor and therefore a smaller RMD.
The factor changes annually as you age, so this is not a one-time calculation.
Step 4: Do the Math
Divide your retirement plan balance (Step 2) by your life expectancy factor (Step 3). The result is the RMD you are required to take for that year. For example: if your December 31 account balance was $500,000 and your life expectancy factor from the Uniform Lifetime Table is 24.6, your RMD for the year would be approximately $20,325.
Make sure you take this amount by December 31 of the distribution year — with the exception of your first-year distribution if you are using the April 1 delay. The penalty for any portion of an RMD that goes untaken is significant, so this deadline matters.
Step 5: Know the Aggregation Rules
If you own more than one retirement account, you have some flexibility in how you take your distributions, but the rules vary by account type. RMDs from traditional IRAs you own can be combined, meaning you can calculate the total required across all your IRAs and take it from any one of them.
The same applies to 403(b) accounts you own. All other account types, including 401(k)s, must be calculated and distributed separately.
This is an area where a holistic planning conversation can add real value. Coordinating distributions across multiple accounts involves your tax bracket, Social Security strategy, Medicare premiums, and legacy goals.
How Prosperity Capital Advisors Can Help You Put It All Together
The year you begin taking distributions, how much you withdraw, and which accounts you draw from first can all affect your tax bracket, your Medicare premiums, the trajectory of your Social Security income, and what you ultimately leave behind.
At Prosperity Capital Advisors, our holistic planning approach evaluates required distributions as part of your complete financial picture— positioning retirement income planning alongside tax management, asset management, protection planning, and legacy planning, so that every decision you make in retirement is working in coordination with the rest of your plan. If you are approaching RMD age or want to revisit how your current distributions fit into your broader strategy, find an advisor near you.
This material was developed and produced by Ed Slott and Company, LLC to provide information on a topic that may be of interest. Ed Slott and Company, LLC is not affiliated with Prosperity Capital Advisors.