If you have a retirement account, you likely need to withdraw a minimum amount each year once you reach a certain age or face a penalty. Those affected by the required minimum distribution (RMD) laws must begin withdrawing by April this year. Here we explain RMD basics and how changes to the tax laws might affect you so you can avoid penalties while freeing up capital to fund senior care expenses.

An older adult couple looks at a tablet and smile at what they see.

Taking required minimum distributions (RMDs) from retirement accounts can be a looming source of stress for some seniors as they consider their financial future. From navigating confusing RMD calculations to the complex laws (to which there have been changes for 2023) to the anxiety of seeing your account balances dwindle, you may have questions and gripes about taking RMDs. Here, we explain RMD basics, the essential changes to 2023 tax laws that might affect you, and how you can use the funds so you withdraw money properly — which ultimately frees up more funding to help pay for long-term senior care services you might need.

What is a required minimum distribution (RMD)?

If you’ve put money into different retirement accounts over the years, your portfolio has grown by the time you reach your early 70s. Unfortunately, the federal government won’t let tax-advantaged retirement accounts grow indefinitely. Instead, they’ve mandated that people begin withdrawing funds after turning 73 and bring the account balance down to fund retirement or pay for senior care. 

Though you might want to leave as much money in your accounts as possible to let them grow, you can also imagine the RMD as an opportunity to reap the fruits of your labor and diligent planning while enjoying your retirement as comfortably as possible.

In most cases, beginning in 2023, the RMD takes effect the April after you turn 73. If you turned 72 in 2022, though, you’ll have to start withdrawing the RMD within a year of April 1st, 2023. The RMD is also a minimum requirement – if you want or need more money from a retirement account, you can exceed the RMD as much as you’d like.

You can calculate your RMD using the IRS’s Uniform Lifetime Table or worksheets. Even with worksheets and tables accessible from the IRS website, calculating the RMD isn’t easy. They aren’t guaranteed by the IRS and are a general tool to help check your work or get a broad idea of your RMD situation. Because finding out an accurate, exact annual RMD is tricky, many seniors mistakenly miss the target and have to pay a hefty penalty. To calculate and take your RMD correctly, ask a trusted tax professional or financial advisor.

Which retirement accounts have RMD rules?

Most retirement accounts are affected by the RMD except the Roth IRA. If you have a retirement portfolio classified as any of these accounts, you’ll have to take an annual RMD:

  • Traditional (non-Roth) IRA.
  • SEP IRA.
  • SIMPLE IRA.
  • 401(k) plan.
  • 403(b) plan.
  • 457(b) plan.
  • A profit-sharing plan.
  • Other defined contribution plan.

Roth IRA account holders do not have to withdraw an annual RMD. If you don’t need the money to pay for long-term care or do but have other accounts that require an RMD, talk to your financial advisor about whether it’s wise to let your Roth IRA account grow for your situation. A note of caution: A beneficiary of a Roth IRA will have to take an RMD, so ensure your family or other beneficiaries prepare for the tax implications of withdrawing a required annual amount. 

How can I use the money from my RMD?

RMDs are entirely discretionary, meaning how you use your withdrawal cash is totally up to you. If you enjoy an active retirement, you can use the RMD and subsequent withdrawals to pay for the next vacation or family visit. If you need to pay for senior care or long-term care, the RMD can also help cover any living expense, including assisted living fees, in-home health care aide payments, and any medical device not covered by insurance that makes your life more pleasant. 

What are the required minimum distribution changes for 2023?

RMD changes in 2023 didn’t help make the situation more transparent, but, for many, the changes enacted in the Secure Act 2.0 ultimately benefit many retirees. Critical RMD changes in 2023 include

  1. The age RMDs take effect, previously 72, is now 73; the starting age will increase to 75 in 2033. The age increase means your money has another year to grow before you have to start withdrawing. Furthermore, since retirement withdrawals usually count as income for recipients, the additional year means another period of reduced Medicare premiums.
  2. We mentioned above that Roth IRAs aren’t subject to the RMD, but this required minimum distribution change is new in 2023. Remember, though, that beneficiaries of Roth IRAs will be subject to RMDs using calculations similar to those we saw above.
  3. We also mentioned penalties for missing an RMD but didn’t specify. In 2023, Congress changed the RMD penalty to 25% of the annual total (down from a whopping 50%) and chopped the penalty further to 10% in case of an honest mistake that’s quickly fixed. 

Conclusion

Ultimately, the RMD doesn’t have to be a source of stress in retirement. Although the rules are complex and the calculations even more, plenty of resources are available to clear the air and lay out precisely what your RMD will be and when you must begin taking it.

Taking your RMDs provides more cash flow to fund a blissful retirement or boost your quality of life by paying for senior care services.