Tax deferral on retirement savings eventually comes to an end. Those who are 73 and older this year must take Required Minimum Distributions (RMDs) from their qualified retirement plan accounts (IRAs, 401(k)s, SEP-IRAs, Simple IRAS, and similar retirement plans but not Roth IRAs). (Different rules apply to inherited retirement accounts, see below.) The amount of the RMD is based upon the value of the account at the start of the year and an actuarial factor from IRS tables. Sample actuarial factors are found in the table below.
When the financial markets are moving in a positive direction, it may make sense to defer taking the RMD until close to the end of the tax year, to maximize account growth. For many taxpayers, especially those who are in their 70s—early in the RMD cycle—it is not uncommon for the total return in the retirement account to be larger than the RMD, so the account keeps on growing for the early years of retirement. The RMD is less than 5% of the account value until after age 80.
Example: Martha is 81 years old in 2024, and her IRA was worth $1 million at the beginning of the year. Her RMD distribution period from the IRS table is 19.4 years, which is equal to 5.15%. Thus, her RMD for this year is $51,500.
Martha’s IRA grew by 20% this year, to $1,200,000, because stock prices have done unusually well. After she takes her RMD, Martha will have $1,148,500 left for next year. Assuming no other change in her account value, next year’s RMD would be $62,133.85.
What if Martha had taken her entire RMD at the beginning of the year instead of waiting until December? Her IRA would have been reduced to $948,500, and would now be worth $1,138,200, about $10,300 less.
In a declining market, the RMDs have the effect of locking in losses. One approach to reducing the impact of market volatility on the retirement account is to take the RMD on a monthly basis, 1/12 each month. This has the virtue of averaging the ups and downs, and it replicates the function of a pension in retirement income management.
Note that failure to take an RMD on time will result in a 25% excise tax on the amount of the failure. The penalty may be reduced to 10% if it is corrected within two years.
Required Minimum Distribution Table
For use by unmarried account owners, married account owners whose spouses aren’t more than 10 years younger, and married account owners whose spouses aren’t the sole beneficiaries of their IRAs.
| Age | Distribution period | Percentage equivalent |
| 73 | 26.5 | 3.77% |
| 74 | 25.5 | 3.92% |
| 75 | 24.6 | 4.07% |
| 76 | 23.7 | 4.22% |
| 77 | 22.9 | 4.37% |
| 78 | 22.0 | 4.55% |
| 79 | 21.1 | 4.74% |
| 80 | 20.2 | 4.95% |
| 81 | 19.4 | 5.15% |
| 82 | 18.5 | 5.41% |
| 83 | 17.7 | 5.65% |
| 84 | 16.8 | 5.95% |
| 85 | 16.0 | 6.25% |
| 86 | 15.2 | 6.58% |
| 87 | 14.4 | 6.94% |
| 88 | 13.7 | 7.30% |
| 89 | 12.9 | 7.55% |
| 90 | 12.2 | 8.20% |
| 91 | 11.5 | 8.70% |
| 92 | 10.8 | 9.26% |
| 93 | 10.1 | 9.90% |
| 94 | 9.5 | 10.53% |
| 95 | 8.9 | 11.24% |
| 96 | 8.4 | 11.90% |
| 97 | 7.8 | 12.82% |
Source: IRS Publication 590-B (2023), Distributions from Individual Retirement Arrangements (IRAs) Table III (Uniform Lifetime); M.A. Co.
A philanthropic alternative
Taxpayers who are older than 70 ½, which also includes everyone who has to take an RMD, have the option to arrange for a direct transfer of up to $100,000 from their IRA to a qualified charity. Formally, this is called a Qualified Charitable Distribution (QCD). Informally, it is sometimes referred to as a charitable IRA rollover.
The QCD will satisfy the required minimum distribution mandate, but it will not be included in taxable income. Accordingly, there will not be a charitable deduction for the gift. Most retirees are not itemizing their deductions anyway and, as a result, get no tax benefit from their charitable giving. The QCD is therefore better than a simple cash gift. What’s more, the QCD will not trigger higher taxes on Social Security benefits.
Inherited retirement accounts
If you have inherited a retirement account, congratulations. This will be a valuable financial asset, but there are special rules for the required minimum distributions from inherited accounts. The rules are quite complicated, so professional tax advice is a must. Note that these rules also apply to inherited Roth IRAs.
The general rule is that an inherited account such as an IRA must be completely distributed over the ten years following the death of the original owner. During that time frame, the heir may withdraw any amount from the account without tax penalty, regardless of the heir’s age. If the original owner had been receiving RMDs, the heir must take at least as much each year as the original owner would have taken.
Follow-up example: Assume that Martha dies in 2025, when she is 82, and she leaves her IRA to a nephew, George. Martha or her estate will still need to take an RMD for the 2025 tax year. George will have to use the actuarial table starting with age 83 to determine his RMDs from the account, and the entire account will have to be distributed to him ten years after Martha dies. He can withdraw more than the RMD without penalty. If George withdraws 10% of the account each year for ten years, he will satisfy the RMD mandate while averaging the income tax cost over that period.
Exceptions: The ten-year rule does not apply to surviving spouses, and it does not apply if the heir is less than ten years younger than the original owner (for example, a sibling). These heirs may use their own life expectancies to determine their RMDs. If a minor child of the owner is the beneficiary, the ten-year rule does not begin until the year the child turns 21.
You might be able to figure your RMDs on your own, but the stakes are pretty high on this issue. An Arvest Wealth Management client advisor can collaborate with your accountant or tax attorney in handling these determinations. Click here to find an advisor near you.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
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Arvest and its associates do not provide tax or legal advice. The information presented here is not intended as, and should not be considered, tax or legal advice. Consult your tax and legal advisors accordingly.