Required Minimum Distribution (RMD) Rules for 401(k)s
When you turn 73, the IRS requires you to start withdrawing money from your 401(k) each year. These withdrawals are called required minimum distributions (or RMDs), and those who don’t take them face potential financial penalties.
The 401(k) RMD rules also apply to other tax-deferred accounts, including traditional IRAs, SIMPLE and SEP IRAs. Roth accounts don’t have RMDs for the account holder.
What’s important to know, as it relates to RMDs from 401(k)s, is that there can be tax consequences if you don’t take them when they’re required — and there are also tax implications from the withdrawals themselves.
What Is an RMD?
While many 401(k) participants know about the early withdrawal penalties for 401(k) accounts, fewer people know about the requirement to make minimum withdrawals once you reach a certain age. Again, these are called required minimum distributions (or RMDs), and they apply to most tax-deferred accounts.
The “required distribution” amount is based on specific IRS calculations (more on that below). If you don’t take the required distribution amount (aka withdrawal) each year you could face another requirement: to pay a penalty of 50% of the withdrawal you didn’t take. However, if you withdraw more than the required minimum each year, no penalty applies.
All RMDs from tax-deferred accounts, like 401(k) plans, are taxed as ordinary income. This is one reason why understanding the amount — and the timing — of RMDs can make a big difference to your retirement income.
What Age Do You Have to Start RMDs?
Prior to 2019, the age at which 401(k) participants had to start taking RMDs was 70½. Under the SECURE Act that was raised to age 72. But the rules have changed again, and the required age to start RMDs from a 401(k) is now 73 — for those who turn 72 after December 31, 2022.
However for those who turned 72 in the year 2022, at that point age 72 was still technically the starting point for RMDs.
But if you turn 72 in 2023, you must wait until you turn 73 (in 2024) to take your first RMD.
In 2033, the age to start taking RMDs will be increased again, to age 75.
How Your First Required Distribution Is Different
There is a slight variation in the rule for your first RMD: You actually have until April 1 of the year after you turn 72 to take that first withdrawal. For example, say you turned 72 in 2022. you would have until April 1, 2023 to take your first RMD.
But you would also have to take the normal RMD for 2023 by December 31 of the same year, too — thus, potentially taking two withdrawals in one year.
Since you must pay ordinary income tax on the money you withdraw from your 401(k), just like other tax-deferred accounts, you may want to plan for the impact of two taxable withdrawals within one calendar year if you go that route.
Why Do Required Minimum Distributions Exist?
Remember: All the money people set aside in defined contribution plans like traditional IRAs, SEP IRAa, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit-sharing plans, and so on, is deposited pre-tax. That’s why these accounts are typically called tax-deferred: the tax you owe is deferred until you retire.
So, requiring people to take a minimum withdrawal amount each year is a way to ensure that people eventually pay tax on the money they saved.
How Are RMDs Calculated?
It can get a bit tricky, but 401(k) RMDs are calculated by dividing the account balance in your 401(k) by what is called a “life expectancy factor,” which is basically a type of actuarial table created by the IRS. You can find these tables in Publication 590-B from the IRS.
If you’re married, there are two different tables to be aware of. If you are the original account owner, and if your spouse is up to 10 years younger than you, or is not your sole beneficiary, you’d consult the IRS Uniform Lifetime Table.
If your spouse is the primary beneficiary, and is more than 10 years younger, you’d consult the IRS Joint and Last Survivor table. Here, the RMD might be lower.
How does the life expectancy factor work?
As a simple example, let’s say a 75-year-old has a life expectancy factor of 24.6, according to the IRS. If that person has a portfolio valued at $500,000, they’d have to take an RMD of $20,325 ($500,000/24.6) from their account that year.
RMDs can be withdrawn in one sum or numerous smaller payments over the course of a year, as long as they add up to the total amount of your RMD requirement for that calendar year.
RMD Rules for 401(k) Plans
So just to recap, here are the basic RMD rules for 401(k) plans. Because these rules are complicated and exceptions may apply, it may be wise to consult with a professional.
Exceptions to Required Distributions
There aren’t many exceptions to 401(k) RMDs. In fact, there’s really only one.
If you’re working for the company sponsoring your 401(k) when you turn 73 years old (as of 2023), and you don’t own more than 5% of the firm, you may be able to skirt RMDs. That is, so long as you keep working for the company, and as long as your plan allows you to do so — not all will.
This only applies to 401(k)s. So if you’re weighing your options as it relates to a 401(a) vs 401(k), for instance, you’ll find they’re limited.
At What Age Do RMDs Start?
As mentioned, you must take your first RMD the same year you turn age 73, with the new rules being applied for 2023 under the SECURE ACT 2.0. Again: for your first RMD only, you are allowed to delay the withdrawal until April 1 of the year after you turn 73.
This has pros and cons, however, because the second RMD would be due on December 31 of that year as well. For tax purposes, you might want to take your first RMD the same year you turn 73, to avoid the potentially higher tax bill from taking two withdrawals in the same calendar year.
What Are RMD Deadlines?
Aside from the April 1 deadline available only for your first RMD, the regular deadline for your annual RMD is December 31 of each year. That means that by that date, you must withdraw the required amount, either in a lump sum or in smaller increments over the course of the year.
Calculating the Correct Amount of Your RMD
Also as discussed, the amount of your RMD is determined by tables created by the IRS based on your life expectancy, the age of your spouse, marital status, and your spouse’s age.
You’re not limited to the amount of your RMD, by the way. You can withdraw more than the RMD amount at any point. These rules are simply to insure minimum withdrawals are met. Also keep in mind that if you withdraw more than the RMD one year, it does not change the RMD requirement for the next year.
Penalties
The basic penalty, if you miss or forget to take your required minimum distribution from your 401(k), is 50% of the amount you were supposed to withdraw.
For example, let’s say you were supposed to withdraw a total of $10,500 in a certain year, but you didn’t; in that case you could potentially get hit with a 50% penalty, or $5,250. But let’s say you’ve taken withdrawals all year, but you miscalculated and only withdrew $7,300 total.
Then you would owe a 50% penalty on the difference between the amount you withdrew and the actual RMD amount: $10,500 – $7,300 = $3,200 x .50 = $1,600
How Did COVID Change RMD Rules?
The pandemic ushered in some RMD rule changes for a time, and it may be easy to get mixed up given those changes. But you should know that things are more or less back to “normal” now (as of 2021) as it relates to RMD rules, so you’ll need to plan accordingly.
As for that rule change: There was a suspension of all RMDs in 2020 owing to COVID. Here’s what happened, and what it meant for RMDs at the time:
• First, in 2019 the SECURE Act changed the required age for RMDs from 70½ to 72, to start in 2020.
• But when the pandemic hit in early 2020, RMDs were suspended entirely for that year under the CARES Act. So, even if you turned 72 in the year 2020 — the then-new qualifying age for RMDs that year — RMDs were waived.
Again, as of early 2021, required minimum distributions were restored. So here’s how it works now, taking into account the 2020 suspension and the new age for RMDs.
• If you were taking RMDs regularly before the 2020 suspension, you needed to resume taking your annual RMD by December 31, 2021.
• If you were eligible for your first RMD in 2019 and you’d planned to take your first RMD by April 2020, but didn’t because of the waiver, you should have taken that RMD by December 31, 2021.
• If you turned 72 in 2020, and were supposed to take an RMD for the first time, then you could have had until April 1, 2022 to take that first withdrawal. (But you could have taken that first withdrawal in 2021, to avoid the tax burden of taking two withdrawals in 2022.)
RMDs When You Have Multiple Accounts
If you have multiple accounts — e.g. a 401(k) and two IRAs — you would have to calculate the RMD for each of the accounts to arrive at the total amount you’re required to withdraw that year. But you would not have to take that amount out of each account. You can decide which account is more advantageous and take your entire RMD from that account, or divide it among your accounts by taking smaller withdrawals over the course of the year.
What Other Accounts Have RMDs?
While we’re focusing on 401(k) RMDs, there are numerous other types of accounts that require them as well. As of 2023, RMD rules apply to all employer-sponsored retirement accounts, according to the IRS — a list that includes IRAs (SEP IRAs, SIMPLE IRAs, and others), but not Roth IRAs while the owner is alive (more on that in a minute).
So, if you have an employer-sponsored retirement account, know that the IRA withdrawal rules are more or less the same as the rules for a 401(k) RMD.
Allocating Your RMDs
Individuals can also decide how they want their RMD allocated. For example, some people take a proportional approach to RMD distribution. This means a person with 30% of assets in short-term bonds might choose to have 30% of their RMD come from those investments.
Deciding how to allocate an RMD gives an investor some flexibility over their finances. For example, it might be possible to manage the potential tax you’d owe by mapping out your RMDs — or other considerations.
Do Roth 401(k)s Have RMDs?
Yes, Roth 401(k) plans do have required minimum distributions, and this is an important distinction between Roth 401(k)s and Roth IRAs. Even though the funds you contribute to a Roth 401(k) are already taxed, you are still required to take RMDs, following the same life expectancy factor charts provided by the IRS for traditional 401(k)s and IRAs.
The big difference being: You don’t owe taxes on the RMDs from a Roth 401(k). You deposit after-tax dollars, and withdrawals are still tax free as they are with an ordinary Roth IRA account.
If you have a Roth IRA, however, you don’t have to take any RMDs, but if you bequeath a Roth it’s another story. Since the rules surrounding inherited IRAs can be quite complicated, it’s wise to get advice from a professional.
Can You Delay Taking an RMD From Your 401(k)?
As noted above, there is some flexibility with your first RMD, in that you can delay your first RMD until April 1 of the following year. Just remember that your second RMD would be due by December 31 of that year as well, so you’d be taking two taxable withdrawals in the same year.
Also, if you are still employed by the sponsor of your 401(k) (or other employer plan) when you turn 73, you can delay taking RMDs until you leave that job or retire.
RMD Requirements for Inherited 401(k) Accounts
Don’t assume that RMDs are only for people in or near retirement. RMDs are usually required for those who inherit 401(k)s as well. The rules here can get quite complicated, depending on whether you are the surviving spouse inheriting a 401(k), or a non-spouse. In most cases, the surviving spouse is the legal beneficiary of a 401(k) unless a waiver was signed.
Inheriting a 401(k) From Your Spouse
If you’re the spouse inheriting a 401(k), you can rollover the funds into your own existing 401(k), or you can rollover the funds into what’s known as an “inherited IRA” — the IRA account is not inherited, but it holds the inherited funds from the 401(k). You can also continue contributing to the account.
Then you would take RMDs from these accounts when you turned 73, based on the IRS tables that apply to you.
Recommended: What Is a Rollover IRA vs. a Traditional IRA?
Inheriting a 401(k) From a Non-Spouse
If you inherit a 401(k) from someone who was not your spouse, you cannot rollover the funds into your own IRA.
You would have to take RMDs starting Dec. 31 of the year after the account holder died. And you would be required to withdraw all the money from the account within five or 10 years, depending on when the account holder passed away.
The five-year rule comes into play if the person died in 2019 or before; the 10-year rule applies if they died in 2020 or later.
Other Restrictions on Inherited 401(k) Accounts
Bear in mind that the company which sponsored the 401(k) may have restrictions on how inherited funds must be handled. In some cases, you may be able to keep 401(k) funds in the account, or you might be required to withdraw all funds within a certain time period.
In addition, state laws governing the inheritance of 401(k) assets can come into play.
As such, if you’ve inherited a 401(k), it’s probably best to consult a professional who can help you sort out your individual situation.
How to Avoid RMDs on 401(k)s
While a 401(k) grows tax-free during the course of an investor’s working years, the RMDs withdrawal is taxed at their current income tax rate. One way to offset that tax liability is for an investor to consider converting a 401(k) into a Roth IRA in the years preceding mandatory RMDs. Roth IRAs are not subject to RMD rules.
What Is a Roth Conversion?
A Roth conversion can be done at any point during an investor’s life, and can be done with all of the 401(k) funds or a portion of it.
Because a 401(k) invests pre-tax dollars and a Roth IRA invests after-tax dollars, you would need to pay taxes right away on any 401(k) funds you converted to a Roth. But the good news is, upon withdrawing the money after retirement, you don’t have to pay any additional taxes on those withdrawals. And any withdrawals are at your discretion because there are no required distributions.
Paying your tax bill now rather than in the future can make sense for investors who anticipate being in a higher tax bracket during their retirement years than they are currently.
The Backdoor Roth Option
Converting a 401(k) can also be a way for high earners to take advantage of a Roth. Traditional Roth accounts have an income cap. To contribute the maximum to a Roth IRA in 2023, your modified adjusted gross income (MAGI) must be less than $138,000 if you’re single, less than $228,000 if you’re married filing jointly, with phaseouts if your income is higher. But those income rules don’t apply to Roth conversions (thus they’re sometimes called the “backdoor Roth” option).
Once the conversion occurs and a Roth IRA account is opened, an investor needs to follow Roth rules: In general, withdrawals can be taken after an account owner has had the account for five years and the owner is older than 59 ½, barring outside circumstances such as death, disability, or first home purchase.
What Should an Investor Do With Their RMDs?
How you use your RMD funds depends on your financial goals. Fortunately, there are no requirements around how you spend or invest these funds (with the possible exception that you cannot take an RMD and redeposit it in the same account).
• Some people may use their RMDs for living expenses in their retirement years. If you plan to use your RMD for income, it’s also smart to consider the tax consequences of that choice in light of other income sources like Social Security.
• Other people may use their 401(k) RMDs to fund a brokerage account and continue investing. While you can’t take an RMD and redeposit it, it’s possible to directly transfer your RMD into a taxable account. You will still owe taxes on the RMD, but you could stay invested in the securities in the previous portfolio.
Reinvesting RMDs might provide a growth vehicle for retirement income. For example, some investors may look to securities that provide a dividend, so they can create cash flow as well as maintain investments.
• Investors also may use part of their RMD to donate to charity. If the funds are directly transferred from the IRA to the charity (instead of writing out a check yourself), the donation will be excluded from taxable income.
While there is no right way to manage RMDs, coming up with a plan can help insure that your money continues to work for you, long after it’s out of your original 401(k) account.
The Takeaway
Investors facing required minimum distributions from their 401(k) accounts may want to fully understand what the law requires, figure out a game plan, and act accordingly. While there are a lot of things to consider and rules to reference, ignoring 401(k) RMDs can result in sizable penalties.
Even if you’re not quite at the age to take RMDs, you may want to think ahead so that you have a plan for withdrawing your assets that makes sense for you and your loved ones. It can help to walk through the many different requirements and options you have as an account holder, or if you think you might inherit a 401(k).
As always, coming up with a financial plan depends on knowing one’s options and exploring next steps to find the best fit for your money. If you’re opening a retirement account such as an IRA or Roth IRA, you can do so at a brokerage, bank, mutual fund house, or other financial services company, like SoFi Invest®.
FAQ
Is my 401(k) subject to RMDs?
Yes, with very few exceptions, 401(k)s are subject to RMDs after its owner reaches age 73, as of 2023. What those RMDs are, exactly, varies depending on several factors.
How to calculate your RMD for your 401(k)?
It’s not an easy calculation, but RMDs are basically calculated by dividing the owner’s account balance by their life expectancy factor, which is determined by the IRS. That will give you the amount you must withdraw each year, or face a penalty.
Can you avoid an RMD on your 401(k)?
You can, if you’re willing to convert your traditional 401(k) account to a Roth IRA. Roth IRAs do not require RMDs, but you will owe taxes on the funds you convert.
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