Retirement distributions made easy
The basics on calculating — and taking — required minimum distributions (RMDs) from your retirement accounts.
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What are RMDs?
RMDs are the minimum amounts that the IRS generally requires you to withdraw from your traditional, SEP or SIMPLE IRA each year once you turn age 70-1/2. RMDs from Roth IRAs are not required during your lifetime.
You’re also required to take RMDs from your employer plan account(s) [e.g., 401(k), 403(b), 457, money purchase and profit-sharing plans]. Those distributions generally begin when you turn age 70-1/2 or when you retire, whichever is later.
Why do I have to take RMDs?
To help you save for retirement, the government offers a number of incentives. A major one is that the contributions you make to your retirement account(s) have the opportunity to grow tax-deferred. In other words, you don’t have to pay taxes on the money you’ve put into your IRA, 401(k), 403(b) or other retirement account until you withdraw it.
When you retire, it’s expected that you’ll regularly withdraw — and pay taxes on — the money that you’ve accumulated.
The RMD rules make sure that you withdraw at least a minimum amount from each of your accounts each year you’re eligible to take a distribution.
How does the current calculation work?
With the current calculation, all you need is your current age, your ending account balance for the previous year and the life expectancy factors found in the IRS Uniform Lifetime Table.
To determine your RMD, divide your account balance by the IRS life expectancy factor corresponding to your age in the table.
Example: Brian is a retired 401(k) participant who turned 70-1/2 on March 31. His daughter, Susan, is the beneficiary on his account. On December 31 of last year, the ending balance in his 401(k) was $262,000. To calculate his RMD for this year, he divides $262,000 by his life expectancy factor of 26.5 years. His distribution amount is $9,886.79.
Is the calculation the same for everyone?
Everyone who is eligible to take RMDs will use the current calculation. However, if you’ve named your spouse as the only beneficiary on your account and he or she is more than 10 years younger than you, then you need to use the joint life expectancy factors in the IRS Joint Life and Last Survivor Expectancy Table to calculate your annual distributions.
Example: Jessica is a 72-year-old IRA owner. Her husband, Jeff, is the sole beneficiary on her account. Jeff is 60 years old. On December 31 of last year, Jessica’s ending account balance was $262,000. To calculate her RMD for this year, she divides $262,000 by the joint life expectancy factor of 27.0 years. Her distribution amount is $9,703.70.
Do I have to take a distribution from each of my retirement accounts?
You need to calculate RMDs for all of your accounts. If you own more than one IRA, you can withdraw your required minimum directly from each, or you can combine your RMDs and withdraw the total from only one. The same is also true if you have more than one 403(b) account.
RMDs from 401(k), 457, money purchase and profit-sharing plan accounts cannot be combined.
Are there alternatives to taking a distribution?
You can invest RMDs taken from your retirement account in a non-retirement account as a way to stretch the financial benefit. However, keep in mind that any income, such as capital gains or dividends, may be taxable.
What are the advantages of the current calculation?
Besides being far less complicated than in the past, using the current calculation will probably result in smaller distributions. You can keep more of your savings growing tax-deferred and stretch your payments over a longer period.
What should I know if I own an American Funds IRA?
Under the current rules, IRA trustees and custodians are required to notify IRA owners about RMDs.
American Funds will notify you each year that you’re eligible to take an RMD from your IRA. You can calculate your own RMD, or you can ask us to do it for you.
We are also required to notify the IRS of your eligibility to take RMDs from your IRA account.
How can I make the most of the current rules?
In addition to simplifying RMDs for you, the current rules also provide greater flexibility for your beneficiaries. Whether retirement is around the corner or years away, you should take this opportunity to review your retirement investments and beneficiary information with your financial professional. Your adviser can explain how the rules work and help you:
- develop a well-rounded retirement saving and distribution plan
- effectively manage your assets in retirement
- plan appropriately for leaving assets to your beneficiaries