As you reach the age of 72, known as the Required Minimum Distribution (RMD) age, it becomes mandatory to start withdrawing funds from your 401(k) retirement account. This is to ensure that you gradually deplete your retirement savings and avoid penalties for excessively large account balances. Withdrawals must begin by April 1st of the year following the year you turn 72, and failure to do so can result in a penalty of 50% of the amount that should have been withdrawn. It’s important to be aware of this requirement and to plan for these withdrawals as part of your retirement income strategy.
Required Minimum Distributions (RMDs)
Mandatory 401(k) withdrawals, known as Required Minimum Distributions (RMDs), are mandated by the Internal Revenue Service (IRS) to ensure that retirement savings are gradually distributed and taxed throughout a retiree’s life.
The age at which RMDs become mandatory depends on the type of retirement account you have. For most traditional IRAs and workplace retirement plans, such as 401(k) and 403(b) plans, the required beginning date (RBD) for RMDs is April 1st of the year after you turn 73. For those that reached age 70½ before January 1, 2020, your RBD is April 1st of the year after you reach 70½.
The RMD for a given year is calculated by dividing the account balance as of December 31st of the previous year by a life expectancy factor provided by the IRS. This factor is based on your age and the age of your designated beneficiary. The table below provides the life expectancy factors for 2023:
| Age | Life Expectancy Factor |
| 72 | 27.4 |
| 73 | 26.5 |
| 74 | 25.6 |
| 75 | 24.7 |
| 76 | 23.8 |
| 77 | 22.9 |
| 78 | 22.0 |
| 79 | 21.2 |
| 80 | 20.3 |
| 81 | 19.5 |
| 82 | 18.7 |
| 83 | 17.9 |
| 84 | 17.1 |
| 85 | 16.3 |
| 86 | 15.6 |
| 87 | 14.9 |
| 88 | 14.2 |
| 89 | 13.5 |
| 90 | 12.8 |
| 91 | 12.2 |
| 92 | 11.5 |
| 93 | 10.9 |
| 94 | 10.3 |
| 95 | 9.7 |
| 96 | 9.2 |
| 97 | 8.7 |
| 98 | 8.2 |
| 99 | 7.7 |
| 100 | 7.3 |
| 101 | 6.9 |
| 102 | 6.5 |
| 103 | 6.2 |
| 104 | 5.9 |
| 105 | 5.6 |
| 106 | 5.3 |
| 107 | 5.1 |
| 108 | 4.8 |
| 109 | 4.6 |
| 110 | 4.4 |
| 111 | 4.2 |
| 112 | 4.0 |
| 113 | 3.8 |
| 114 | 3.6 |
| 115 | 3.4 |
RMDs are generally subject to ordinary income tax. Failing to take your RMD by the deadline can result in a penalty of 50% of the amount that should have been withdrawn.
Age 72: The Starting Point
The age at which you must start taking mandatory withdrawals from your 401(k) is 72. This is known as the required minimum distribution (RMD). The RMD is the minimum amount you must withdraw from your 401(k) each year to avoid a 50% penalty tax on the amount you should have withdrawn.
The RMD is calculated based on your age and the balance of your 401(k) at the end of the previous year. The IRS provides a table of life expectancies that you can use to calculate your RMD. You can also use the IRS’s RMD Worksheet to calculate your RMD.
How To Avoid Penalties
- Take your RMD by the December 31st deadline each year.
- Withdraw the correct amount. The IRS will assess a 50% penalty tax on any amount you should have withdrawn but didn’t.
- If you’re still working and under age 72, you can delay taking RMDs from your current employer’s plan.
Failing to take your RMDs can result in significant penalties. It’s important to understand the rules and make sure you’re taking the correct amount each year.
RMD Table
| Age | Life Expectancy | RMD Factor |
|---|---|---|
| 72 | 25.6 | 0.039 |
| 73 | 24.8 | 0.040 |
| 74 | 23.9 | 0.042 |
| 75 | 23.0 | 0.043 |
| 76 | 22.1 | 0.045 |
Exceptions and Penalties
Individuals who meet certain exceptions may be able to avoid mandatory 401(k) withdrawals at age 72. These exceptions include:
- Still actively working
- Substantially equal owners of the business sponsoring the plan
- Participants who have not yet reached age 59½ and separate from service during or after the calendar year they reach age 72
Individuals who are not eligible for an exception and fail to take required minimum distributions (RMDs) from their 401(k) account may face penalties. These penalties include:
- A 50% penalty tax on the amount that should have been taken as an RMD
- The penalty is applied to the entire amount that should have been withdrawn, not just the portion that was not withdrawn
- The penalty is due on April 15 of the year following the year in which the RMD was due
To avoid penalties, individuals should consult with a financial advisor to determine their RMD requirements and ensure they are taking the necessary distributions from their 401(k) account.
| Scenario | RMD Age |
|---|---|
| Still actively working | No mandatory withdrawal |
| Substantially equal owner of sponsoring business | No mandatory withdrawal |
| Not yet 59.5 and separate from service in the same year they reach 72 | No mandatory withdrawal |
Roth IRAs and RMDs
Roth IRAs are tax-advantaged accounts that allow individuals to save for retirement. Unlike traditional IRAs, contributions to Roth IRAs are made after-tax, but qualified withdrawals in retirement are tax-free. Roth IRAs do not have required minimum distributions (RMDs), which means that individuals can leave their money in the account and continue to earn tax-free growth for as long as they want.
Traditional IRAs and 401(k) plans, on the other hand, do have RMDs. RMDs are the minimum amount that individuals must withdraw from their accounts each year after they reach age 72. The RMD amount is calculated based on the individual’s account balance and life expectancy. If individuals do not withdraw the required amount, they may be subject to a 50% excise tax on the amount that they should have withdrawn.
| Account Type | RMD Age |
|---|---|
| Traditional IRA | 72 |
| Roth IRA | Not Applicable |
| 401(k) Plan | 72 |
Well, there you have it, folks! The ins and outs of mandatory 401k withdrawals, all wrapped up in one tidy article. Planning for retirement can be a bit of a headache, but now you’re a step closer to getting those ducks in a row. Thanks for sticking with me through all the details. If you’ve got any more financial questions keeping you up at night, come on back to our blog. I’ll be here, ready to dive into the next topic that’s on your mind!