Retirement accounts like traditional IRAs and 401(k)s offer powerful tax-deferred growth. But there comes a time when Uncle Sam requires you to start taking money out and paying the associated taxes. Those mandatory withdrawals are called Required Minimum Distributions (RMDs) and understanding them is essential to avoid costly penalties and tax surprises.
What Are Required Minimum Distributions?
Required Minimum Distributions (RMDs) are the minimum amounts you must withdraw each year from certain tax-deferred retirement accounts once you reach a specific age. The IRS requires you to take these withdrawals to ensure that tax-deferred dollars eventually get taxed as income.
Accounts subject to RMD rules generally include:
- Traditional IRAs
- SEP IRAs and SIMPLE IRAs
- 401(k), 403(b), and 457(b) plans
RMDs do not apply to Roth accounts while the original owner is alive (though beneficiaries may have RMD obligations after an owner’s death).
How are RMDs calculated?
Your Required Minimum Distribution is calculated by dividing your retirement account balance (as of December 31 of the previous year) by a life expectancy factor from an IRS table
The IRS provides life expectancy tables that estimate how long your money is expected to last. In general, the older you get, the smaller the life expectancy factor becomes — meaning your RMD percentage increases over time.
Note: Most retirees use the IRS Uniform Lifetime Table to calculate their RMD. However, if your spouse is more than 10 years younger than you and is the sole beneficiary of the account, the Joint Life and Last Survivor Table may be used instead. This table produces a larger life expectancy factor, which results in a smaller required withdrawal.
RMD Ages Changed Under SECURE Act 2.0
The SECURE Act 2.0 of 2022 significantly updated when retirees must begin RMDs, giving many people more time to grow their savings or create a tax strategy before mandatory withdrawals start.
Here’s the current timeline for RMD starting ages:
- Age 73 — For individuals who reach age 72 after December 31, 2022, RMDs must start by April 1 of the year after they turn 73.
- Age 75 — Beginning January 1, 2033, the required age will increase again to 75 for those born in 1960 or later.
The bottom line is that if you turn 73 before 2033, your RMDs will start at age 73. If you turn 73 in 2033 or later, your RMDs will start at age 75 unless further adjustments to start ages are made.
Important: Your first RMD must be taken by April 1 of the year after you reach the required age (73 today), and subsequent RMDs must be taken by December 31 each year thereafter.
If you delay your first RMD until April 1 of the year after you reach the age threshold, you will have to take two distributions in one calendar year which can increase your taxable income significantly.
How are RMDs taken?
RMDs can be taken as one lump sum or in as many distributions as desired. Distributions do not have to be equal or regular as long as the total amount distributed by December 31 meets the RMD requirement.
It is often a good idea to have taxes withheld from your RMDs. This will help to avoid surprise taxes or penalties when filing your taxes.
If you have multiple retirement accounts that are subject to RMD rules, each account must first calculate its RMD separately based on its own December 31 year-end balance. However, the withdrawal rules differ depending on the type of account.
For traditional IRAs, you can calculate the RMD for each IRA and then combine the total amount, taking the full distribution from one IRA or across multiple IRAs if you prefer.
Employer-sponsored plans such as 401(k), 403(b), and 457(b) accounts generally do not allow this aggregation. RMDs from these plans typically must be taken separately from each individual plan. In other words, you usually cannot satisfy a 401(k) RMD by withdrawing funds from an IRA.
It’s also important to remember that RMD rules apply individually to each account owner. If both spouses have retirement accounts and are required to take RMDs, each spouse must take their required distribution from their own accounts. One spouse cannot take both RMDs from a single account.
Once an RMD is withdrawn, it generally cannot be rolled back into a tax-deferred retirement account. After paying any applicable taxes, however, the remaining funds can be reinvested in a taxable brokerage account or used for other financial goals.
What if you are still working?
If you reach RMD age and are still working, you may not be required to take an RMD from the retirement plan of your current employer. RMDs from previous employer plans or IRAs will still be required. However, 401k or IRA contributions may be able to offset the tax.
If you own 5% of the company or more, this exception does not apply.
How RMDs Affect Your Taxes
RMDs are taxable as ordinary income at the federal level in the year you receive them. That means they can:
- Push you into a higher tax bracket
- Increase the amount of your Social Security that’s taxable
- Affect Medicare Part B/D premiums, which are based on income levels
- Affect your ability to qualify for certain credits or deductions
In addition to federal income taxes, RMDs may also be subject to state income taxes depending on where you live. Some states offer partial or full exclusions for retirement income, so the tax impact of RMDs can vary significantly by state.
Because of these impacts, it’s crucial to include your expected RMD tax bill in annual tax planning.
Penalties for Missing an RMD
Failing to take your full RMD by the deadline used to trigger a 50% excise tax on the shortfall. SECURE 2.0 reduced that penalty:
- 25% of the unpaid amount if you miss an RMD
- Potentially 10% if corrected in a timely manner once you discover the mistake
That’s still a steep cost — and one that’s easily avoided with proper planning.
Strategic Planning Tips
Here are smart ways to manage RMDs and potentially reduce taxes:
- Roth Conversions Before RMD Age
Converting traditional retirement dollars to a Roth IRA before RMDs begin can reduce future RMDs and grow tax-free. Roth IRAs don’t have lifetime RMDs for original owners.
If you’re 70½ or older, you can direct distributions from your IRA directly to a qualified charity with no tax implication for you. Prior to the age at which RMDs begin, this will lower the amount in your IRA. After your RMDs begin, this will satisfy part or all of your RMD while removing the funds from taxable income.
- Plan Withdrawals to Optimize Tax Brackets
Taking planned withdrawals before your RMD age — especially in low-income years — can help avoid spiking into higher tax brackets later on.
Final Thoughts
Understanding when RMDs start, how they are taxed, and what strategies can reduce the impact will help you keep more of your hard-earned savings during retirement. Talk with a fee-only financial advisor to review tax planning opportunities tailored to your situation.
