Required Minimum Distributions (RMDs) and Which Accounts Require RMDs

Slide 1: Title:  RMDs: Your Tax-Deferred Bill. 

 Okay, let's talk about Required Minimum Distributions, or RMDs. This is a fundamental concept for anyone with tax-deferred retirement accounts.

What are they? They are mandatory withdrawals you have to start taking from your retirement accounts once you reach a certain age.

Why do they exist? The reason is simple. The government gave you a tax break for many years, allowing your money to grow tax-deferred inside tax-deferred accounts like an IRA, 401(k) and 403(b). Now, the government wants to get the tax revenue it deferred. RMDs are how they collect that deferred tax.

When do they start? This is an important detail. The age has been a source of confusion, so I want to be clear. It's now generally age 73 for those of you who turn 72 after 2022. Once you hit this age, the clock starts ticking. You must take your RMD each year by December 31st. 

Slide 2: Title:  Which Accounts Are Affected? 

You need to know which of your accounts are subject to RMDs.

The most common tax-deferred accounts that require RMDs are: Traditional IRAs and most employer-sponsored plans like 401(k)s, 403(b)s, and 457(b) plans.

However, there is one crucial exception that I want to highlight. Roth IRAs do NOT require RMDs for the original account owner. This is a huge benefit of a Roth IRA, as it gives you more control and flexibility in your retirement years. Your money can continue to grow tax-free, and you can leave it to your heirs if you choose.

Also, it's worth noting that if you are still working for a company, you may be able to delay your RMD from that specific company's 401(k) plan until you retire.

Slide 3: Title:  Starting date for RMD Required Minimum Distribution

As we've discussed, Required Minimum Distributions are a key part of retirement planning, but the age at which they begin isn't the same for everyone. It all depends on your birth year. I want to walk you through the current 2025 rules so you know exactly where you stand.

For those of you who were born before July 1, 1949, your RMD start age was 70 and a half. If you are in this group, you should already be taking your annual required withdrawals.

Now, for the next group: if you were born in 1949 or 1950, your RMD start age was 72. Again, for this group, you should already be taking your RMDs each year.

This next group is a very important one because of the recent changes in the law. If you were born between 1951 and 1959, your RMD start age is now 73. This is good news, as it gives you an extra year to let your money continue to grow tax-deferred before you have to start taking withdrawals.

Finally, for those of you born in 1960 or later, the rules change again. Your RMD start age will be 75. This is the latest possible start age under the current law.

The main takeaway here is that your RMD start age isn't a single number; it's specific to your birth year. Knowing your correct start age is the first step to properly managing your retirement accounts and avoiding any costly penalties."

Slide 4: Title:  The Simple RMD Formula. 

 Now, let's talk about how the RMD is calculated. It's a straightforward formula. Most financial firms will calculate this for you, but it's useful to understand the basics.

There are two parts to the calculation:

Part 1: The Account Balance. Your RMD for this year is based on the account balance on December 31st of the previous year. For example, your 2025 RMD would be based on your account balance on December 31, 2024.

Part 2: The Life Expectancy Factor. The IRS provides a table, called the Uniform Lifetime Table, which gives a 'factor' based on your age. 

The formula is as simple as this: RMD = Previous Year's Account Balance / Life Expectancy Factor. For example, a 73-year-old with a $500,000 IRA would use the factor for their age to determine the exact dollar amount they must withdraw for the year. 

Slide 5: Title:  Life expectancy factor from the IRS

The IRS provides life expectancy tables to help you calculate your Required Minimum Distribution (RMD). The most commonly used table is the Uniform Lifetime Table. This table gives you a specific factor based on your age, which you use in the RMD formula to determine how much you must withdraw from your tax-deferred retirement accounts each year.

The image on the slide shows the IRS table with “Age” and “Distribution period (Life Expectancy Factor)”. Our next slide explains in more detail the RMD formula.

Slide 6: Title:  Calculating your Required Minimum Distribution (RMD)

Now that we know when you need to take an RMD, let's look at how you calculate the amount. 

The first piece you need is your Previous Year's Account Balance. This is the total value of your retirement account on December 31st of the previous year. For example, to calculate your RMD for 2025, you would use the balance from your account statement on December 31, 2024. Your financial institution will provide this balance to you each year.

The second piece is the Life Expectancy Factor. The IRS provides an official table, most commonly called the Uniform Lifetime Table, that assigns a factor based on your age. The way it works is simple: the older you get, the smaller the factor becomes. And as the factor gets smaller, the amount you're required to take out—the RMD—becomes a larger percentage of your overall account.

So, the entire calculation is just this: you take your previous year’s account balance and divide it by the life expectancy factor for your age. While your financial firm will almost always calculate this for you and let you know the exact amount, it's very helpful to understand the basic process. Knowing these two components is the key to understanding your RMD.

Slide 7: Title:  The RMD Penalty: Don't Get Caught! 

I cannot stress this enough: The penalty for missing an RMD is severe and something you absolutely want to avoid.

The penalty is a significant 25% tax on the amount that should have been withdrawn. This is a penalty on top of the regular taxes you would have paid on the withdrawal.

Let's look at an example. If your RMD for the year was $20,000 and you completely forgot to take it, you would owe a $5,000 penalty to the IRS. That's a huge financial hit for something that is completely avoidable.

Make sure you know your RMD amount and have a plan to take it out each year. Set up a reminder, or, even better, talk to your financial advisor or your brokerage firm. This is important - many of firms can set up an automatic withdrawal, so you don't have to worry about it. It’s a simple step that can save you from a major financial headache. An additional note: While your first year's RMD deadline is extended to April 1 of the next year, you will then need to take two years' worth of RMDs in that second year.

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