If you have money in tax-deferred retirement accounts, such as traditional IRAs, 401(k)s, and other types of retirement savings for which you received a tax deduction for contributing, you can’t simply let that money compound forever. In most cases, you are required to start taking distributions – known as required minimum distributions or RMDs – once you turn 73 years old.
Specifically, you must take your first RMD by April 1 of the year after the year in which you turn 73. In each subsequent year, your RMD is due by Dec. 31. So, if you turn 75 years old in 2025, your RMD must be withdrawn by Dec. 31, 2025. But if you turn 73 in 2025, you’ll have until April 1, 2026, to take it.
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How much is your RMD with $500,000?
First of all, RMDs are based on your account balance at the end of the previous year, not at the time you actually take the RMD. So, if you are required to take an RMD by the end of 2025, you’d use the balance as of Dec. 31, 2024.
Next, you’d use the appropriate IRS life expectancy table. For most seniors, this would be the Uniform Lifetime Table. There’s a separate table to use if your spouse is more than 10 years younger than you and are the sole beneficiary of your retirement account.
Let’s see how this works. We’ll say you had $500,000 in your 401(k) at the end of 2024 and that you’ll turn 75 years old in 2025.
According to the Uniform Lifetime Table, a 75-year-old should use a distribution period of 24.6 years when calculating an RMD. So, you’d simply divide the year-end balance by this factor. $500,000 divided by 24.6 years gives you an RMD of $20,325. You can withdraw it all at once or in increments, but this amount must be removed from your tax-deferred retirement account by the end of 2025, or you can face stiff penalties.
