When you’re nearing retirement, knowing how much you need to withdraw from your retirement account each year is essential. Many types of retirement accounts allow people to delay paying taxes on the contributed funds. However, the government – primarily through the Internal Revenue Service (IRS) – has rules in place to ensure that the funds are appropriately taxed. One way that’s done is with required minimum distributions (RMDs), which people have to take at a specific time.
Meeting the RMD requirement is essential for avoiding penalties. As a result, using an RMD calculator can help a person stay on the right side of the law. Here’s what you need to know about RMD calculators.
What Are RMDs?
RMDs are the minimum amount a person must withdraw from tax-deferred retirement accounts (those that have tax advantages in the year contributions are made) once they reach a particular age. That includes the following kinds of retirement accounts:
- Most 401(k)s
- Most 403(b)s
- SEP IRA
- Simple IRA
- Traditional IRA
Roth IRAs are not subject to RMDs since the tax advantages are related to withdrawals, not contributions. Additionally, based on information from the IRS, some Roth accounts in 401(k) and 403(b) plans won’t be subject to RMDs in 2024 and beyond.
When RMDs begin was recently adjusted due to the passage of the SECURE 2.0 Act. Starting in 2023, the age where RMDs must begin became 73. However, those who reach age 72 in 2023 must make their first distribution before April 1, 2025, which counts toward the 2024 withdrawal. If you turn 73 in 2023 and were 72 in 2022, then the first RMD is due on April 1, 2023, based on your December 31, 2021 account balance, and the second must occur by December 31, 2023, based on your December 31, 2022, balance.
What Does an RMD Calculator Do?
An RMD calculator allows you to determine your required minimum distribution without having to reference the IRS tables and perform the calculations yourself. There are three tables – Uniform Lifetime, Table I (Single Life Expectancy, and Table II (Joint Life and Last Survivor Expectancy) – and each one applies to a different situation. In some cases, that makes using IRS worksheets to determine your RMD feel a bit complex.
With an RMD calculator, the calculator handles all of the math. You simply answer some basic questions about your age, account balance, and whether you’re the primary on the retirement account. After that, the RMD calculator determines which calculation strategy applies to your situation. Then, it provides an answer in the form of the dollar amount, showing how much you need to withdraw from the retirement account to meet the legal RMD requirement.
How Does It Work?
Essentially, an RMD calculator works by performing the various calculations that you would otherwise do manually using a worksheet or similar solution. RMD calculators are functionally small applications or programs, and they’re designed to select the right mathematical approaches based on the inputs you provide.
As long as the starting information you provide is accurate, the figure the calculator lists as your required minimum distribution is typically correct. The RMD calculator relies on the calculations presented by the IRS, and they’re generally reflective of the mandated RMDs based on current laws.
However, you need to make sure you use an RMD calculator from a reputable source that’s regularly updated to address any law changes. Additionally, it’s potentially wise to perform the calculation using a few different RMD calculators. That way, you can see if there are any discrepancies in the provided responses, allowing you to identify any issues that could lead to failure to meet the RMD requirement.
