If you’ve been saving in a traditional 401(k) or IRA, you’ve probably heard of Required Minimum Distributions or RMDs. These are withdrawals you’re required to take every year after you turn 73. It’s a way for the Internal Revenue Service to get paid back for all that tax-free income you’ve saved over the years.
While there are strategies to avoid and reduce RMDs, for many retirees, it’s just a part of life once you hit 73. But that doesn’t mean it’s one of those things you shouldn’t give too much thought to. After all, your RMDs are treated as ordinary income, which means you have to pay taxes on your withdrawals.
For that alone, it’s important to withdraw the correct amount each year. Plus, if you take out too little or forget to take RMDs altogether, you could face a penalty of as much as 25%. And if you go overboard and withdraw too much, you may face a shortfall later on in your retirement, especially if the withdrawals happened during a downturn in the stock market. That is known as a sequence of return risk, and it’s something retirees should try to avoid.
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Calculating your RMDs
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For all those reasons, it’s important to know how much your annual RMDs should be. The good news is: it’s easy to calculate. RMDs are determined by a straightforward formula that takes into account your account balance and life expectancy factor. Your life expectancy factor is obtained 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 reestimates your remaining lifespan with every birthday you celebrate. The older you get, the lower your life expectancy is, and the more you have to pay in RMDs. The IRS doesn’t want you to die without paying them back.
The formula is the following:
Account Balance/Life Expectancy Factor = RMD
A $1 million retirement balance is common among retirees in America. As of the end of 2024, Fidelity Investments found that 41% of all 401 (k) millionaires were baby boomers. Generation X — or those between the ages of 45 and 60 — accounted for 57% of all 401(k) millionaires. If you are among them, here’s how much you need to withdraw in RMDs across different ages:
|
Age |
Life Expectancy Factor |
RMD |
|
73 |
26.5 |
$37,736 |
|
75 |
24.6 |
$40,650 |
|
80 |
20.2 |
$49,505 |
|
85 |
16 |
$62,500 |
Be aware of taxes
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For savers, RMDs can prove particularly problematic because of the tax treatment. If you are required to withdraw $40,000 in one year because you have a $1 million IRA, that extra income 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 before 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.
Planning is the best protection
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You can’t completely avoid RMDs, but you don’t have to be caught off guard by them.
By projecting what your mandatory distributions will look like on a $1 million nest egg, you can make moves now to lower your overall tax hit. Remember, RMDs are a fact of life, but the amount you hand over to the IRS doesn’t have to be.
Editor’s note: This article is part of a series that looks at RMDs by age and retirement balance. The previous story is: Got $5 Million Saved for Retirement? Here Are the Huge RMDs the IRS Makes You Take at Ages 73, 75, 80 and 85.
