Calculating Your Required Minimum Distribution (RMD)

November 9, 2022

Topics: RMD | Tax tips | Taxes | Retirement

Media type: Article, Podcast

Calculating Your Required Minimum Distribution (RMD)

5.3 minute read • 

November 9, 2022

Whether you’re getting ready to retire or already enjoying it, one thing is true:
You want to get the most out of your earnings and protect them from unnecessary fines. This may seem easier said than done, especially when mandatory minimum distribution (RMD) rules change from time to time and RMD and withdrawal strategies have tax implications. We are here to help you:

Learn how RMDs work.
Avoid tax penalties.
Plan ahead for your RMD in the years leading up to the RMD. Understanding Inherited IRAs and Their Tax Consequences.
What is an RMD?
RMDs are required minimum distributions that investors age 72 and older can take.

If you turn 72 this year and take your first RMD, you have until April 1, 2024 to do so. For each subsequent year, you must complete your RMDs by December 31st. Keep in mind, if you delay your initial RMD until April 1, you’ll be responsible for 2 withdrawals that year (one by April 1 and one by December 31), which could result in a larger tax liability.
If you’re older than 72, you must take your RMD by December 31 each year.
Note:
Roth IRAs aren’t currently subject to RMDs.

Taxes matter, so work with a tax and financial professional. This is key because withdrawal strategies, including Social Security timing decisions, have tax consequences beyond RMDs.

—Maria Bruno, head of Vanguard U.S. Wealth Planning Research

Set a reminder to avoid the penalty
It’s very important to withdraw your RMD on an annual basis. If you forget, you’ll face a 50% penalty tax on any amount not withdrawn. What if I don’t need RMD assets?
RMDs are designed to spread your retirement savings and related taxes over your lifetime. If you don’t need cash to meet your spending needs, consider the following:

Reinvest your distribution in a tax-deductible account to enjoy continued growth. You can then add beneficiaries to this account without sending future RMDs.
Give up to $100,000 to a qualified charity each year. Generally, qualified charitable or QCD payments are not subject to ordinary federal income tax. Therefore, they are not included in your taxable income.
How to make sure not to pay the 50% penalty?
Depending on how much you need to take, the cost of not having an RMD can be high. To avoid penalties, withdraw the full amount each year. Otherwise, you’ll owe the IRS 50% of the shortfall.

Hypothetical example

Penalty for missing the entire distribution or a portion of it

RMD amount Amount distributed Amount not distributed
(subject to the 50% penalty) 50% IRS penalty tax
$18,000 $0 $18,000 $9,000
$18,000 $6,000 $12,000 $6,000
$18,000 $18,000 $0 $0
Does Vanguard offer a service that can help with my RMD calculations and distributions?
Once you reach RMD age, we’ll automatically calculate your annual distribution amount for any traditional IRAs and Individual 401(k)s held at Vanguard. You’ll receive an annual statement in late January and can also find your calculation here. You can also enroll in our free and convenient RMD Service, which allows you to set up your RMDs to be automatically distributed each year. This is a great way to make sure you don’t miss a hand and get penalized 50%.

Easily subscribe to automated mailing lists
All you need to do is set up a one-time allotment for one year or an RMD allotment for the whole year.

sign up today

How is RMD calculated?
Calculating the RMD amount can be a bit tricky, so we recommend leaving it to the experts. But here’s a general overview of how it works.

RMD amounts are determined by looking at the following factors:

Your age as of December 31 of the current year and your corresponding life expectancy factor according to the IRS Uniform Lifetime Table or Joint Life and Last Survivor Table if your spouse is your sole beneficiary and more than 10 years younger than you.
Your retirement account balance as of December 31 of the previous year, which should be adjusted to include any outstanding rollovers or asset transfers that weren’t in the account at year-end. Note:
In this situation, you’ll need to call Vanguard to confirm the value of the outstanding rollover assets that need to be included in your December 31 balance.
For example, if the life expectancy factor for your age is 22.9, and the value of your IRA is $800,000, your RMD would be $34,934.50 ($800,000/22.9).

New life expectancy calculations are here
A new IRS table will be used for 2023 RMDs. The table (keep an eye out for the updated table in February/March of 2023) provides a larger life expectancy factor per age, which will result in smaller RMD amounts. This is good news because you still have the ability to withdraw more if needed, but you can also take advantage of a larger account balance with the potential for further growth.

What are the RMD rules for inherited IRAs?
If you inherited an IRA, including a Roth IRA, you must withdraw RMDs from the account. You don’t owe taxes on withdrawals from an inherited Roth IRA as long as the original owner has held the account for at least 5 years. But you will have to pay taxes on withdrawals from an inherited traditional IRA. The rules governing how an IRA beneficiary should receive RMDs depend on when the original account holder died and the type of beneficiary. For example:

In general, non-spouse beneficiaries who inherit an IRA from someone who died in 2020 or later may be required to withdraw the entire account balance within 10 years.
Spousal beneficiaries and certain eligible non-spousal beneficiaries may be entitled to RMDs for life expectancy.
See our past RMD calculation methodology for details.

What tax tips should RMD ex-retirees consider?
When you’re over 59½ and in your pre-RMD years, you have the flexibility to annually revisit how to minimize your taxes―both now and in the future. For example, if you have a large balance in a tax-deferred account, like a traditional IRA or 401(k), and could face high RMDs in the future, you may benefit from:

Withdrawing those assets in the years leading up to age 72. While you’ll be accelerating some tax liability up front, you’ll be lowering future RMDs through a smaller account balance.
Converting some of your traditional IRA assets to a Roth IRA, which isn’t currently subject to RMDs or taxes when you withdraw your assets in retirement (provided you’ve held the account for at least 5 years). Learn more about the benefits of a Roth conversion to see if it might be a smart move for you.