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401(k) Required Minimum Distributions (RMDs) now start at age 72

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 when you turn 72.

Articles by Mikang Kim, QKA
By Mikang Kim, QKA Senior 401(k) Compliance Manager, Betterment for Business Published Jul. 21, 2021
Published Jul. 21, 2021
4 min read

401(k) plans can help you save for retirement in a significantly 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 72. 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 72. 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.

When do I have to start taking RMDs?

Before the 2019 SECURE Act, RMDs applied to employees who turned 70 ½. However, this legislation increased the RMD age to 72 starting in 2020.

You may remember that the CARES Act, passed in March 2020 in response to the COVID-19 crisis, temporarily waived RMDs for 2020. RMDs resumed for the 2021 plan year with the newly increased age limit of 72.

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 uniform lifetime table (shown below). As a note, if you had no balance at the end of the previous year, then your first RMD will not occur until the following year.

Uniform Lifetime Table
Age of Plan Participant Life Expectancy (in Years)
70 27.4
71 26.5
72 25.6
73 24.7
74 23.8
75 22.9
76 22.0
77 21.2
78 20.3
79 19.5
80 18.7
81 17.9
82 17.1
83 16.3
84 15.5
85 14.8
86 14.1
87 13.4
88 12.7
89 12.0
90 11.4
91 10.8
92 10.2
93 9.6
94 9.1
95 8.6
96 8.1
97 7.6
98 7.1
99 6.7
100 6.3
101 5.9
102 5.5
103 5.2
104 4.9
105 4.5
106 4.2
107 3.9
108 3.7
109 3.4
110 3.1
111 2.9
112 2.6
113 2.4
114 2.1
115 and older 1.9

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 72 need to take an RMD?

Turning 72 in a given year doesn’t mean that you have to take an RMD. Only those who turn 72 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 72. 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 72 on June 1, 2021. John also decided to leave his company on August 1, 2021. He has been continuously contributing to his 401(k) account for the past 5 years. The first RMD must occur by April 1, 2022. The next RMD must occur by December 31, 2022 and every year thereafter.
      • NOTE: that this criteria means that you do NOT need to take an RMD if you meet the RMD age and are still working.
  • You are a beneficiary or alternate payee of an account holder who meets the above criteria.

What are the consequences of not taking an RMD?

Failure to take an RMD for a given year will result in a penalty of 50% of the amount not taken on time by the IRS.

How do I take an RMD?

Your employer will notify you that you may be subject to an RMD and provide you with an RMD form. You will need to fill and return this form to your employer for approval. Betterment will process the RMD and the distribution will be delivered via the method of your choice (check or ACH).

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