What is a Required Minimum Distribution?

In exchange for all of the tax advantages 401(k)s provided during your accumulation years, by law, you will need to start taking distributions from your account at a certain age.

401(k) plans can help you save for retirement in a tax-advantaged way. However, the Internal Revenue Service (IRS) requires that you start taking withdrawals from their qualified retirement accounts when you reach the age 73 (in 2025). These withdrawals are called required minimum distributions (RMDs).

Why do I have to take RMDs?

In exchange for the tax advantages you enjoy by contributing to your 401(k) plan, the IRS requests collection of taxes on these amounts when you turn 73. The IRS taxes RMDs as ordinary income, meaning withdrawals will count towards your total taxable income for the year. 

Generally, the IRS collects taxes on the gains in retirement accounts such as 401(k)s. However, if Roth 401(k) account assets are held for at least 5 years, Roth 401(k) funds are not taxed. Because there are taxes being paid to the government, these distributions are NOT eligible for rollover to another account. 

How much do I have to withdraw?

RMDs are calculated based on your age and your account balance as of the end of the previous year. To determine the required distribution amount, Betterment divides your previous year’s ending account balance by your life expectancy factor (based on your age) from the IRS’ uniform lifetime table. If you had no balance at the end of the previous year, then your first RMD will not occur until the following year.

Additionally, if you have taken a cash distribution from your 401(k) account in any given year you are subject to an RMD, and that distribution amount is equal to or greater than the RMD amount, that distribution will qualify as the required amount and no additional distribution is required.

Does everyone who turns 73 need to take an RMD?

Reaching the age requirement in a given year doesn’t mean that you have to take an RMD. Only those who reach the age requirement in a given year AND meet any of the following criteria must take an RMD:  

  • You have taken an RMD in previous years. If so, then you must take an RMD by December 31 of every year.
  • You own more than 5% of the company sponsoring the 401(k) plan. If so, then you must take an RMD by December 31 every year. 
  • You have left the company (terminated or retired) in the year you turned 73. If so, then the first RMD does not need to occur until April 1 (otherwise known as the Required Beginning Date) of the following year, but must occur consecutively by December 31 for every year. 
    • Example: John turned 73 on June 1, 2022. John also decided to leave his company on August 1, 2024. He has been continuously contributing to his 401(k) account for the past 5 years. The first RMD must occur by April 1, 2025. The next RMD must occur by December 31, 2025 and every year thereafter. 
  • You are a beneficiary or alternate payee of an account holder who meets the above criteria. 

If you are 73 and still employed, you do NOT need to take an RMD.

What are the consequences of not taking an RMD?

Failure to take an RMD for a given year will result in a penalty of 25% of the amount not taken on time by the IRS.

How do I take an RMD?

Betterment will automatically process your RMD if we see that you are over the required age and no longer actively employed with your employer. If you have the option to take an RMD - age 73 but still employed - your employer can provide you with a form to submit a request. If you have a linked bank account on file, the RMD will be deposited into that account; if we do not have a bank account on file, a check will be mailed to the address in your account.