Required minimum distributions (RMDs) are mandatory withdrawals from tax-deferred retirement accounts that begin at a certain age. The IRS wants to collect taxes on money that has been growing tax-free for decades. Understanding RMD rules helps you plan effectively and avoid costly penalties.
What Are Required Minimum Distributions?
RMDs are the minimum amounts you must withdraw annually from certain retirement accounts once you reach the required age. These withdrawals are taxed as ordinary income.
Accounts Subject to RMDs
- Traditional IRAs: All traditional IRA accounts
- 401(k) and 403(b) plans: Employer-sponsored retirement plans
- 457(b) plans: Government deferred compensation plans
- SIMPLE and SEP IRAs: Small business retirement plans
- Inherited IRAs: Including inherited Roth IRAs
Accounts NOT Subject to RMDs During Your Lifetime
- Roth IRAs: No RMDs while the original owner is alive
- Roth 401(k)s: Starting in 2024, no longer subject to RMDs
Key benefit of Roth accounts: No RMDs means your money can continue growing tax-free for as long as you live. This makes Roth accounts excellent for estate planning.
When Do RMDs Begin?
The age for beginning RMDs has changed several times in recent years. The SECURE Act and SECURE 2.0 Act pushed the age back.
RMD Starting Ages
- Born before July 1, 1949: RMDs began at 70.5
- Born July 1, 1949 - December 31, 1950: RMDs begin at 72
- Born 1951 - 1959: RMDs begin at 73
- Born 1960 or later: RMDs begin at 75
First RMD Deadline
Your first RMD must be taken by April 1 of the year following the year you reach the RMD age. However, all subsequent RMDs must be taken by December 31 of each year.
Warning: If you delay your first RMD until April 1, you will have to take two RMDs in the same calendar year (first year and current year). This could push you into a higher tax bracket.
How to Calculate Your RMD
The RMD calculation involves dividing your account balance by a life expectancy factor.
Basic RMD Formula
RMD = Account Balance (December 31 of prior year) divided by Life Expectancy Factor
Life Expectancy Tables
The IRS provides three tables for RMD calculations:
- Uniform Lifetime Table: Used by most account owners. This is the default table.
- Joint Life Expectancy Table: Used when spouse is sole beneficiary and more than 10 years younger
- Single Life Expectancy Table: Used by beneficiaries of inherited accounts
Sample Calculation
If you are 75 years old with a $500,000 IRA balance:
- Life expectancy factor at 75: 24.6 (from Uniform Lifetime Table)
- RMD = $500,000 / 24.6 = $20,325
- You must withdraw at least $20,325 during the year
Selected Life Expectancy Factors
- Age 73: 26.5
- Age 75: 24.6
- Age 80: 20.2
- Age 85: 16.0
- Age 90: 12.2
Approximate RMD Percentage
- Age 73: 3.8%
- Age 75: 4.1%
- Age 80: 5.0%
- Age 85: 6.3%
- Age 90: 8.2%
RMD Penalties
Failing to take your full RMD results in significant penalties.
Previous Penalty
Before 2023, the penalty for missing an RMD was 50% of the amount not withdrawn - one of the harshest penalties in the tax code.
Current Penalty
The SECURE 2.0 Act reduced the penalty to 25% of the amount not withdrawn. If you correct the mistake promptly (within the correction window), the penalty drops to 10%.
How to Correct a Missed RMD
- Take the missed distribution as soon as possible
- File IRS Form 5329 with your tax return
- Attach a letter explaining the error and the steps taken to correct it
- Request a penalty waiver for reasonable cause
RMD Strategies
Strategic planning can help you manage RMDs and minimize their tax impact.
Roth Conversions Before RMD Age
Converting Traditional IRA funds to Roth before RMDs begin can reduce future required distributions. You pay taxes now, but the converted funds grow tax-free and are not subject to RMDs.
Qualified Charitable Distributions (QCDs)
If you are 70.5 or older, you can donate up to $105,000 per year directly from your IRA to charity. QCDs count toward your RMD but are not included in taxable income.
- Must go directly from IRA to qualified charity
- Cannot receive anything in return for the donation
- Particularly valuable if you do not itemize deductions
Aggregate Multiple IRAs
If you have multiple Traditional IRAs, you can calculate the total RMD for all accounts but take the distribution from any one or combination of them.
Still Working Exception
If you are still working and do not own more than 5% of the company, you may be able to delay RMDs from your current employer's 401(k) until you retire. This does not apply to IRAs or previous employers' plans.
Tax Planning Around RMDs
RMDs increase your taxable income, which can have cascading effects.
Potential Tax Impacts
- Higher tax bracket: RMDs can push you into a higher marginal rate
- Social Security taxation: Higher income can make more of your Social Security taxable
- Medicare premiums: Income above certain thresholds increases Medicare Part B and D premiums
- Net Investment Income Tax: High RMDs can trigger the 3.8% NIIT
Smoothing Strategies
- Convert to Roth in lower-income years before RMDs begin
- Take larger distributions in lower-income years
- Use QCDs to satisfy RMDs without increasing taxable income
- Consider the timing of other income sources
Planning tip: The years between retirement and RMD age are often the best time for Roth conversions. Your income may be lower, and you can fill up lower tax brackets while reducing future RMDs.
Inherited Account RMDs
Inherited retirement accounts have different RMD rules that depend on your relationship to the original owner.
Surviving Spouse
A surviving spouse has the most flexibility:
- Can roll the account into their own IRA
- Can treat it as an inherited IRA
- Can delay RMDs until the deceased would have reached RMD age
Eligible Designated Beneficiaries
Certain beneficiaries can stretch distributions over their life expectancy:
- Minor children (until they reach majority)
- Disabled individuals
- Chronically ill individuals
- Individuals not more than 10 years younger than the deceased
Other Designated Beneficiaries
Most other beneficiaries must deplete inherited accounts within 10 years. Annual RMDs may be required depending on when the original owner died.
RMD Aggregation Rules
The rules for combining RMDs vary by account type.
IRAs
Calculate the RMD for each Traditional IRA, then take the total from any one or combination of Traditional IRAs.
401(k) and 403(b) Plans
Each employer plan must satisfy its own RMD. You cannot aggregate across different employers' plans.
403(b) Exception
You can aggregate RMDs across multiple 403(b) accounts, similar to IRAs.
Track Your Retirement Withdrawals
Pro Trader Dashboard helps you monitor your retirement accounts and plan for required distributions.
Summary
Required minimum distributions are an unavoidable part of tax-deferred retirement accounts. Understanding when they begin, how to calculate them, and strategies to minimize their tax impact helps you keep more of your retirement savings. Consider Roth conversions before RMD age, use qualified charitable distributions if you are charitably inclined, and work with a tax professional to optimize your withdrawal strategy.
Learn more about retirement planning with our guides on Social Security timing strategies and retirement portfolio allocation.