Managing your retirement savings isn’t just about growing your nest egg—it’s also about understanding when and how to withdraw funds. Required Minimum Distributions (RMDs) are IRS-mandated withdrawals you must take from tax-deferred retirement accounts once you reach age 73. Failing to take these distributions can result in a substantial penalty—25% of the amount not withdrawn.

RMD rules apply to traditional IRAs, 401(k)s, 403(b)s, and most employer-sponsored retirement plans. However, there are notable exceptions, including Roth IRAs and accounts associated with your current employer in certain situations. Understanding these requirements is crucial as RMDs become part of your taxable income, potentially affecting your overall tax situation in retirement.

What Is a Required Minimum Distribution (RMD)?

A Required Minimum Distribution (RMD) is the minimum amount the Internal Revenue Service (IRS) requires you to withdraw from your tax-deferred retirement accounts each year once you reach a specific age. These mandatory withdrawals ensure that retirement account holders don’t indefinitely defer paying taxes on their retirement savings.

Important Points to Remember

RMDs apply to tax-deferred retirement accounts including traditional IRAs, 401(k)s, and 403(b)s. Here are key facts to know:

• Age requirement: You must begin taking RMDs at age 73 (for those born between 1951-1959) or age 75 (for those born in 1960 or later)
• Deadline: Annual RMDs must be withdrawn by December 31, except for your first RMD which can be delayed until April 1 of the following year
• Multiple accounts: If you have several retirement accounts, you’ll need to calculate the RMD for each account separately
• Tax implications: RMDs are generally taxable as ordinary income, except for any portion representing after-tax or nondeductible contributions
• Penalties: Failing to take your RMD results in a 25% tax penalty on the amount not withdrawn (reduced from the previous 50% penalty)
• Correction window: The penalty drops to 10% if you correct the missed RMD within the designated correction window

Roth IRAs are exempt from RMDs during the original account owner’s lifetime, making them advantageous for tax planning. Additionally, if you’re still working, you may delay RMDs from your current employer’s retirement plan until you retire.

Grasping Required Minimum Distributions (RMDs)

Required Minimum Distributions (RMDs) are IRS-mandated withdrawals that retirement account owners must take annually after reaching a specific age. These distributions ensure the government eventually collects tax revenue on your tax-deferred retirement savings.

RMDs apply to several retirement account types:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• SARSEP IRAs
• 401(k) plans
• 403(b) plans
• 457(b) plans

For IRA owners, RMDs must begin when you reach age 73 (for those born between 1951-1959). The age increases to 75 for individuals born in 1960 or later. If you have an employer-sponsored plan like a 403(b), you can delay taking RMDs until you retire if you’re still working.

The calculation process requires determining your RMD amount for each account separately. While you must calculate individual amounts for each IRA, you can aggregate these amounts and withdraw the total from one IRA or proportionally from multiple IRAs. However, employer plan RMDs (such as 401(k)s) can’t be combined – each requires its own separate withdrawal.

Your first RMD must be taken by April 1 of the year following the year you turn 73. All subsequent RMDs must be withdrawn by December 31 each year. Taking your first RMD in the year after turning 73 means taking two distributions in that calendar year – your delayed first RMD and your second RMD.

The tax implications are straightforward: RMDs are generally treated as ordinary income for tax purposes, except for any portion representing after-tax or non-deductible contributions. Unlike other retirement account distributions, RMDs can’t be rolled over into another retirement account.

Failing to take the full required amount results in a 25% excise tax on the amount not withdrawn. This penalty can be reduced to 10% if you correct the shortfall during a two-year correction window.

Roth IRAs stand out as exceptions – they don’t require RMDs during the original owner’s lifetime, making them valuable tools for tax-free growth throughout your retirement years.

Unique Considerations

Inherited IRAs and RMDs

Inherited IRAs have distinct RMD rules based on your relationship to the deceased. As a spouse beneficiary, I can treat the inherited IRA as my own or take distributions based on my life expectancy. Non-spouse beneficiaries generally must withdraw all assets within 10 years of the original owner’s death under the SECURE Act of 2019. This 10-year rule applies to most beneficiaries who inherited accounts after January 1, 2020, including children (except minors), grandchildren, and non-family beneficiaries.

Qualified Charitable Distributions (QCDs)

QCDs offer a tax-efficient strategy for meeting RMD requirements. I can donate up to $100,000 annually directly from my IRA to qualified charities, counting toward my RMD without increasing my taxable income. This approach is particularly beneficial for individuals who don’t itemize deductions, as QCDs effectively function as a charitable deduction without requiring itemization. The donation must transfer directly from the IRA custodian to the charity to qualify as a QCD.

RMDs During Market Downturns

Taking RMDs during market downturns presents challenges, as withdrawals can lock in losses. Strategic approaches include:

• Taking RMDs early in years with positive market performance
• Withdrawing in-kind distributions of securities rather than cash
• Using cash reserves from non-retirement accounts temporarily if possible
• Identifying specific investments to liquidate that align with portfolio rebalancing goals

Impact of Roth Conversions

Converting traditional IRA assets to Roth IRAs before RMDs begin can reduce future required withdrawals. The ideal conversion window typically falls between retirement and age 73, when income might be lower. While conversions generate immediate taxable income, they create tax-free growth potential and eliminate future RMDs on those converted assets. Converting gradually over several years often minimizes the tax impact.

RMDs for Still-Working Individuals

The “still working” exception applies exclusively to employer-sponsored plans—not IRAs. I can delay RMDs from my current employer’s plan if:

1. I’m still employed
2. I don’t own more than 5% of the company
3. The plan allows this provision

This exception doesn’t apply to any previous employer plans or any IRAs, including SEP and SIMPLE IRAs, which still require RMDs regardless of employment status.

State Tax Considerations

RMD taxation varies by state. While most states tax RMDs similarly to the federal government, some states offer:

Understanding my state’s specific tax treatment of retirement distributions helps with comprehensive tax planning.

Required Minimum Distributions (RMDs) and Inherited IRAs

Inherited IRAs have special RMD rules that differ from those for original account owners. When you inherit an IRA, you must satisfy RMD requirements separately from your personal retirement accounts – you can’t combine these calculations or distributions.

The RMD rules for inherited IRAs vary based on several factors:

• Beneficiary relationship to the deceased account owner
• Type of IRA inherited (traditional or Roth)
• Date of the original account owner’s death

For inherited traditional IRAs, you’re typically required to withdraw funds and pay the associated income taxes, even if you haven’t reached age 73 yourself. These inherited account RMDs can’t be aggregated with your personal IRA RMDs, nor can they be satisfied by taking distributions from your own retirement accounts.

If you’ve inherited multiple IRAs from the same person, you can calculate the RMD separately for each account but then withdraw the total required amount from any one or combination of those inherited IRAs. This aggregation flexibility only applies to IRAs inherited from the same person – not across different inheritances.

Unlike original Roth IRA owners who don’t face RMDs during their lifetime, beneficiaries who inherit Roth IRAs are subject to RMD rules. Even though these distributions from inherited Roth IRAs maintain their tax-free status (assuming the five-year holding period has been met), you’re still required to take them according to the IRS timeline.

For qualified retirement plans (QRPs) like 401(k)s, you must take RMDs from each inherited plan separately – these cannot be aggregated with inherited IRA distributions or distributions from your personal retirement accounts.

Understanding these distinct rules for inherited retirement accounts helps avoid penalties and creates more effective tax planning strategies during the inheritance process.

Sample Calculation of a Required Minimum Distribution (RMD)

Calculating your RMD follows a straightforward formula that divides your retirement account balance by a life expectancy factor. Let’s walk through a practical example to illustrate how this works in real-world terms.

To calculate an RMD:

1. Take the year-end value of your retirement account (December 31 of the previous year)
2. Find your distribution period on the IRS Uniform Lifetime Table based on your age
3. Divide the account value by the distribution period

For instance, consider Joe, an 80-year-old retiree with a traditional IRA valued at $100,000 at the end of last year. According to the IRS Uniform Lifetime Table, the distribution period for an 80-year-old is 20.2 years.

Joe’s RMD calculation would be:

$100,000 ÷ 20.2 = $4,950.50

This means Joe must withdraw at least $4,950.50 from his IRA this year to satisfy his RMD requirement.

It’s important to note that as you age, your distribution period decreases each year, resulting in larger required withdrawals. This design aligns with the IRS’s intent to ensure retirement assets are distributed during your lifetime.

For those with multiple retirement accounts, remember that while you must calculate RMDs separately for each account, you can withdraw the total amount from one or more IRAs. However, RMDs from employer plans like 401(k)s must be taken separately from each plan.

The IRS provides specific tables for different situations. Most retirees use the Uniform Lifetime Table, but if your spouse is more than ten years younger than you and is your sole beneficiary, you’ll need to consult IRS Publication 590-B for the Joint Life and Last Survivor Expectancy Table.

Understanding When Required Minimum Distributions (RMDs) Begin

The timing of your first Required Minimum Distribution depends on your age and retirement status. Thanks to the SECURE 2.0 Act, the RMD age requirements have recently changed.

For individuals born between January 1, 1951, and December 31, 1958, RMDs must begin at age 73. If you were born on January 1, 1960, or later, you won’t need to take RMDs until age 75.

Here’s a clear breakdown of the current RMD age requirements:

Your Required Beginning Date (RBD) is generally April 1 following the year you turn 73 (based on current rules). For your first RMD, you have until April 1 of the year after you reach your RMD age. All subsequent RMDs must be taken by December 31 of each year.

If you delay your first RMD until April 1 of the following year, you’ll need to take two distributions in that calendar year—your first RMD by April 1 and your second RMD by December 31. This could potentially push you into a higher tax bracket.

For employer-sponsored retirement plans like 401(k)s, 403(b)s, and governmental 457(b) plans, there’s an important exception. If you’re still working for the employer sponsoring your retirement plan, you can delay taking RMDs from that specific plan until April 1 following the year you retire. This “still working” exception doesn’t apply to IRAs or plans from former employers.

RMDs must be taken separately from each employer-sponsored plan you own. For IRAs (Traditional, SEP, and SIMPLE), you’ll calculate the RMD for each account, but you can withdraw the total amount from one or more of your IRAs.

Are RMD Withdrawals Subject to Tax?

RMD withdrawals are generally taxed as ordinary income at your personal federal income tax rate. The IRS treats these distributions just like other withdrawals from traditional tax-deferred retirement accounts. State taxes may also apply depending on your location, with some states offering partial exemptions or tax-free treatment of retirement distributions.

There are important tax considerations to understand about RMDs:

• Non-deductible contributions aren’t taxed again when withdrawn as part of an RMD, but you must have filed IRS Form 8606 to document these contributions
• After-tax money in your retirement accounts reduces the taxable portion of your RMD proportionately
• Roth IRA distributions aren’t subject to RMDs during the original owner’s lifetime, and qualified withdrawals remain tax-free
• Tax brackets may be affected by RMDs, potentially pushing you into a higher bracket depending on the amount withdrawn

If you fail to take your full RMD by the deadline, the penalty is substantial. Prior to 2023, the tax rate on missed RMDs was 50% of the amount not withdrawn. Thanks to recent legislation, this penalty has been reduced to 25%, and can be further lowered to 10% if you correct the shortfall during a two-year correction window.

For missed RMDs, you’ll need to file IRS Form 5329, specifically Part IX which addresses additional tax on excess contributions. If you missed the deadline for legitimate reasons, you can request a waiver from the IRS by following the instructions in the “waiver of tax for reasonable cause” section of Form 5329.

After taking your RMD, you have several options for the withdrawn funds:

• Invest in a taxable brokerage account
• Contribute to a 529 college savings plan
• Make a current year contribution to a Traditional or Roth IRA (if you have earned income)
• Make a Qualified Charitable Distribution (QCD) directly to a charity

Remember that excess amounts withdrawn don’t offset future years’ RMDs – you’ll still need to take the calculated minimum amount each subsequent year regardless of how much extra you withdrew previously.

What Happens If I Fail to Take RMDs?

Failing to take your Required Minimum Distributions (RMDs) on time results in significant penalties from the IRS. The penalty for missed RMDs has been reduced from 50% to 25% under the SECURE 2.0 Act, but it remains substantial. For example, if your RMD is $10,000 and you don’t withdraw it by the deadline, you’ll face a $2,500 penalty.

This penalty can be further reduced to 10% if you:

• Take the missed RMD within the “correction window”
• File an updated tax return reflecting the correction
• Submit a Form 5329 with an explanation for the missed distribution

The correction window typically extends until the earlier of:

1. The date the IRS issues a notice of deficiency for the excise tax
2. The date the excise tax assessment is made
3. The last day of the second taxable year after the year in which the missed RMD was due

The IRS tracks RMDs through Form 5498, which financial institutions submit annually to report retirement account balances. Your account custodian also sends you Form 1099-R when you take distributions, creating a paper trail that makes it difficult to avoid detection for missed RMDs.

If you discover you’ve missed an RMD, it’s best to withdraw the required amount immediately and file Form 5329 with a letter explaining the oversight. The IRS may waive the penalty if you can demonstrate the failure was due to reasonable error and that you’re taking steps to remedy the situation.

Multiple missed RMDs compound the problem, as each year’s missed distribution carries its own separate penalty. The IRS calculates the penalty on the difference between what you should have withdrawn and what you actually took, not on the entire account balance.

For inherited IRAs, beneficiaries face the same penalties for missed RMDs, making it crucial to understand the distribution requirements for these accounts as well.

When Must You Begin Taking IRA Distributions?

The timing of your first Required Minimum Distribution (RMD) depends on your birth year due to recent changes in federal law. The SECURE 2.0 Act adjusted the RMD starting age, creating different requirements based on when you were born.

If you reached age 72 on or before December 31, 2022, you’re already required to take RMDs and must continue doing so annually. For those who hadn’t reached age 72 by December 31, 2022, you must take your first RMD by April 1 of the year after you turn 73.

Traditional IRA owners must begin taking annual distributions no later than April 1 of the year following the year you reach your RMD applicable age, regardless of your employment status. For example, if you turn 73 in 2024, you must begin taking distributions by April 1, 2025.

While your first RMD can be delayed until April 1 of the year after you reach the RMD age threshold, subsequent RMDs must be withdrawn by December 31 of each calendar year. This creates a situation where you might need to take two distributions in your first RMD year—your delayed initial RMD and your second RMD by December 31.

The “still working” exception doesn’t apply to traditional IRAs. Even if you’re still employed, you can’t delay RMDs from your traditional IRA accounts. This exception only applies to qualified retirement plans from your current employer, such as 401(k)s, 403(b)s, and governmental 457(b) plans.

For inherited IRAs, different rules apply. The distribution requirements depend on several factors:

• The date of the original IRA owner’s death
• Your relationship to the deceased owner
• The type of IRA you’ve inherited

If you’ve inherited an IRA, you must take an RMD for the year of the IRA owner’s death if they had an unfulfilled RMD obligation. The distribution method you’ll use is determined by the original owner’s date of death and your beneficiary classification.

Roth IRAs follow different rules. RMDs don’t apply to Roth IRAs during the owner’s lifetime, providing greater flexibility for tax planning. However, beneficiaries who inherit Roth IRAs may be subject to RMD requirements, depending on their relationship to the deceased and when the account was inherited.

Why Are RMDs Required by the IRS?

The IRS mandates Required Minimum Distributions as a mechanism to ensure tax collection on retirement funds that have grown tax-deferred for decades. The fundamental principle behind RMDs is straightforward: the government has waited patiently for tax revenue on these accounts and now requires systematic withdrawals to collect those deferred taxes.

Tax-deferred retirement accounts like traditional IRAs, 401(k)s, and similar plans allow individuals to contribute pre-tax dollars, with taxes postponed until withdrawal. Without RMD requirements, account owners could theoretically leave these funds untouched indefinitely, passing them to heirs without the government ever collecting taxes on the initial contributions or subsequent growth.

RMDs function as the IRS’s safeguard against unlimited tax deferral. The Internal Revenue Code specifically establishes these distribution requirements to:

• Ensure tax collection on previously untaxed retirement contributions
• Prevent indefinite tax sheltering of retirement assets
• Generate tax revenue from accumulated investment earnings
• Discourage using retirement accounts primarily as wealth transfer vehicles

The timing of RMDs—beginning at age 73—reflects a balance between allowing sufficient time for retirement savings to grow and ensuring the government ultimately collects tax revenue within the account owner’s lifetime. The age requirement increased from 70½ to 72 under the SECURE Act of 2019, and then to 73 under the SECURE 2.0 Act, demonstrating the government’s recognition of increasing lifespans while maintaining the fundamental tax collection objective.

The 25% excise tax penalty (reduced from the previous 50%) for failing to take required distributions underscores the seriousness with which the IRS views these withdrawals. This substantial penalty exists specifically to discourage attempts to avoid the required distributions and associated income taxation.

Importantly, Roth IRAs aren’t subject to RMDs during the owner’s lifetime precisely because those contributions were made with after-tax dollars, and the government has already collected its tax revenue on that money.

Concluding Thoughts

RMDs play a crucial role in your retirement strategy. While they ensure you’re using your retirement savings as intended they also present important tax considerations that require careful planning.

Understanding your specific RMD requirements isn’t optional – it’s essential for avoiding costly penalties and maximizing your retirement income. I recommend working with a financial advisor to develop strategies that align with your overall retirement goals.

Remember that RMD rules can change as legislation evolves so staying informed is key. By proactively managing your required distributions you’ll maintain control over your retirement assets and create more financial flexibility for yourself during your retirement years.

Frequently Asked Questions

What are Required Minimum Distributions (RMDs)?

RMDs are minimum amounts the IRS requires you to withdraw annually from tax-deferred retirement accounts once you reach a certain age. These mandatory withdrawals ensure the government collects taxes on money that grew tax-free during your working years. The withdrawal amount is calculated based on your account balance and life expectancy factors determined by the IRS.

At what age do RMDs begin?

For individuals born between 1951-1959, RMDs must begin at age 73. Those born in 1960 or later won’t need to take RMDs until age 75. Your first RMD must be taken by April 1 of the year following the year you turn the required age. All subsequent RMDs must be withdrawn by December 31 of each year.

Which retirement accounts are subject to RMDs?

RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, SARSEP IRAs, 401(k) plans, 403(b) plans, and 457(b) plans. Notably, Roth IRAs are exempt from RMDs during the original owner’s lifetime. However, inherited Roth IRAs may be subject to RMDs depending on your relationship to the deceased account owner.

What happens if I miss an RMD deadline?

Failing to take an RMD by the deadline results in a 25% tax penalty on the amount not withdrawn. This penalty can be reduced to 10% if you correct the missed withdrawal within a specific timeframe and file the appropriate forms with the IRS. The penalty is in addition to the regular income tax owed on the distribution.

How are RMDs calculated?

RMDs are calculated by dividing your retirement account balance as of December 31 of the previous year by a life expectancy factor from IRS tables. Different tables apply depending on your circumstances. While you must calculate RMDs separately for each account, you can withdraw the total amount from one or multiple IRAs.

Are RMDs taxable?

Yes, RMDs are generally taxed as ordinary income in the year you receive them. The exception is if you made after-tax contributions to your retirement accounts. State taxation of RMDs varies—some states exempt retirement income, while others tax it fully or partially. Consider consulting a tax professional for your specific situation.

Can I roll over my RMD to another retirement account?

No, RMDs cannot be rolled over to another retirement account or converted to a Roth IRA. Once you take an RMD, you must include it in your taxable income for the year. However, after satisfying your RMD, you can roll over or convert additional withdrawals from your retirement accounts if eligible.

Can I still work and delay taking RMDs?

If you’re still working and don’t own more than 5% of the company where you’re employed, you may delay RMDs from that employer’s retirement plan until you retire. This “still working” exception does not apply to IRAs or plans from previous employers. You must still take RMDs from these accounts on schedule.

What are Qualified Charitable Distributions (QCDs)?

QCDs allow individuals age 70½ or older to donate up to $100,000 annually directly from their IRA to qualified charities. These distributions count toward your RMD requirement but aren’t included in your taxable income. QCDs offer a tax-efficient way to satisfy RMDs while supporting charitable causes.

How do RMDs work for inherited retirement accounts?

Inherited retirement accounts have different RMD rules based on your relationship to the deceased and when they passed away. For deaths after 2019, most non-spouse beneficiaries must empty the account within 10 years. Spouses, disabled individuals, and certain other beneficiaries may have more flexible distribution options.