RMD (Required Minimum Distribution)

Key Takeaways

• A Required Minimum Distribution (RMD) is the mandatory annual withdrawal that retirees must take from certain tax-deferred retirement accounts once they reach the government-specified age.
• RMD rules apply to Traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored plans including traditional 401(k)s, 403(b)s, and 457(b)s. Roth IRAs have never required lifetime RMDs, and Roth 401(k) and Roth 403(b) accounts are also exempt from lifetime RMDs, aligning with Roth IRA treatment under SECURE 2.0.
• The starting age for RMDs increased under the SECURE 2.0 Act: individuals born 1951-1959 must begin RMDs at age 73 (effective 2023), while those born in 1960 or later will begin at age 75 (effective 2033). 
• Final IRS regulations issued in July 2024 clarified that individuals born in 1959 follow the age 73 threshold, resolving a drafting ambiguity in the original legislation.
• The IRS determines each year's RMD using account balance and life expectancy, as outlined in official life expectancy tables.
• Failure to withdraw the correct RMD amount triggers penalties, currently 25% of the amount not taken (reduced to 10% if corrected within two years).
• RMD withdrawals are taxed as ordinary income, and they can affect tax brackets, Medicare premiums, and Social Security taxation.
• Retirees can take their total RMD from one or multiple IRA accounts, but employer plans like 401(k)s generally require separate withdrawals from each plan.
• Qualified Charitable Distributions (QCDs) allow individuals aged 70½ or older to donate up to $108,000 per year directly from their IRA to a qualified charity, which can satisfy all or part of the RMD without increasing taxable income.

What Is a Required Minimum Distribution (RMD)?

A Required Minimum Distribution (RMD) is a mandatory withdrawal that individuals must take from certain tax-deferred retirement accounts once they reach the designated age set by the IRS. It represents the government's mechanism for ensuring that taxes are eventually paid on money that has accumulated tax-free over many years. Without RMDs, savers could indefinitely defer taxes on their retirement funds, which is why these withdrawals are required beginning in later life.

The rule applies primarily to accounts funded with pre-tax contributions, such as Traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored plans like 401(k) and 403(b) accounts. Roth IRAs are an exception because they are funded with after-tax dollars; no RMDs are required during the account holder's lifetime. However, inherited Roth IRAs are still subject to distribution rules.

Each year, the Internal Revenue Service (IRS) provides official life expectancy tables that determine how much must be withdrawn. The RMD amount is calculated by dividing the prior year's account balance (as of December 31) by the factor shown on these tables. This ensures that withdrawals are proportionate to both account size and remaining life expectancy, keeping the process standardized for all retirees.

In addition to federal tax policy, recent legislation (most notably the SECURE 2.0 Act of 2022) has changed when and how RMDs begin. The starting age was raised from 72 to 73 in 2023, increasing to age 75 for those born in 1960 or later (with first required beginning dates starting in 2033). These adjustments give retirees more flexibility to manage their investments and reduce taxable income before distributions begin. Understanding these details helps individuals align their withdrawal timing with their broader retirement and tax strategies.

How RMD Works

Eligibility Requirements

RMDs apply to anyone who owns a tax-deferred retirement account such as a Traditional IRA, SEP IRA, SIMPLE IRA, or employer-sponsored plan like a 401(k) or 403(b). The rule also applies to inherited retirement accounts, even if the beneficiary is younger than retirement age. Under the SECURE 2.0 Act, the starting age for RMDs increased to 73 in 2023 and will rise again to 75 in 2033. Anyone turning that age must begin taking required distributions by April 1 of the following year.

If you are still employed and contributing to a 401(k) or 403(b), you may be able to delay your first RMD until after retirement, depending on your employer's plan rules. This exemption applies only to participants who own 5% or less of the company; those with greater than 5% ownership must take RMDs regardless of employment status. This exemption does not apply to IRAs, where distributions must begin regardless of employment status.

Calculation Method

Each year's RMD is determined by dividing the account balance as of December 31 of the previous year by the IRS's life expectancy factor from the relevant life expectancy table. The IRS currently provides three tables:

• Uniform Lifetime Table – used by most account holders.
• Joint Life and Last Survivor Table – used when a spouse more than 10 years younger is the sole beneficiary.
• Single Life Table – used for inherited accounts.

Step-by-Step Example

1. Find your retirement account balance as of December 31 of the previous year.
2. Locate your life expectancy factor from the appropriate IRS table.
3. Divide your balance by that factor to find your annual RMD amount.
4. Withdraw that amount from the account before December 31 of the current year.

Example: If your IRA balance was $400,000 and your life expectancy factor is 26.5, your RMD for the year would be $15,094 ($400,000 ÷ 26.5).

Tax Treatment

RMD withdrawals are treated as ordinary income and are taxed at your marginal tax rate for the year. They are not subject to early withdrawal penalties once you reach RMD age, but they do count toward your adjusted gross income (AGI). Higher income may affect other areas, such as Medicare premiums and taxable Social Security benefits.

If you do not need the withdrawn funds for living expenses, you can reinvest them in a taxable brokerage account. However, reinvesting does not remove the income tax obligation on the distribution itself.

Distribution Rules

You can take your RMD as a lump sum or through multiple withdrawals during the year, as long as the total amount meets or exceeds your calculated RMD. Withdrawals can be made in cash or in-kind, allowing investors to transfer securities instead of selling them.

For individuals with multiple IRA accounts, the total RMD can be taken from one or more of those IRAs in any combination. However, RMDs from employer plans such as 401(k)s or 403(b)s must be withdrawn separately from each plan.

If you fail to take the full RMD by the deadline, the IRS can impose a 25% excise tax on the amount not withdrawn, reduced from the previous 50% penalty under SECURE 2.0. This penalty is automatically reduced to 10% if you correct the shortfall within two years by taking the missed distribution and filing Form 5329. Separately, the IRS retains discretion to waive the penalty entirely if you can demonstrate reasonable cause for the failure, such as serious illness, reliance on incorrect professional advice, or financial institution error. The waiver request process remains available even with the lower penalty rates.

How RMD Rules Differ by Account Type

The following comparison reflects key differences in Required Minimum Distribution rules discussed in retirement planning education. Individual tax treatment and eligibility depend on account type, employment status, and personal circumstances. This comparison is for educational illustration only.

Recent Law Changes Affecting RMDs

The rules governing Required Minimum Distributions have evolved significantly over the past few years. The SECURE Act of 2019 first raised the starting age for RMDs from 70½ to 72, reflecting longer life expectancy and modern retirement patterns. The SECURE 2.0 Act of 2022 expanded these updates further by pushing the RMD age to 73 starting in 2023, and again to 75 beginning in 2033.

Another significant change under SECURE 2.0 eliminates lifetime RMD requirements for Roth 401(k) and Roth 403(b) accounts, effective January 1, 2024. Previously, these designated Roth accounts in employer plans were subject to RMDs even though Roth IRAs were not. This alignment creates consistency across all Roth account types and provides additional tax planning flexibility for retirees who hold Roth balances in workplace retirement plans. However, beneficiaries who inherit Roth accounts in employer plans remain subject to distribution rules after the account owner's death.

These legislative changes allow retirees to keep funds invested longer, providing additional growth potential before mandatory withdrawals begin. However, the deferral also means that later RMDs can become larger, potentially creating higher taxable income in later years. Staying aware of current age thresholds and tax changes ensures distributions remain compliant with IRS rules.

Tax Implications and Planning Strategies

Since RMDs are taxed as ordinary income, managing when and how they are taken can have a significant impact on overall tax liability. Withdrawals add to annual income, which may increase tax brackets, affect Medicare premium tiers, and make more of one's Social Security benefits taxable.

Strategies to Manage RMD Taxes

Consider Qualified Charitable Distributions (QCDs): Individuals aged 70½ or older can transfer up to $108,000 per year directly from an IRA to a qualified charity. The amount donated counts toward the RMD but does not increase taxable income.

Coordinate Withdrawals with Other Income Sources: Timing distributions during lower-income years or before claiming Social Security can help reduce tax exposure.

Partial Roth Conversions: Converting a portion of a Traditional IRA to a Roth IRA before RMD age can lower future RMD obligations, since Roth accounts are exempt from lifetime RMDs.

Take Early Withdrawals Strategically: For retirees in lower tax brackets before RMD age, withdrawing small amounts early can smooth income over time and reduce large RMDs later.

Proper coordination between financial planners and tax professionals can turn RMD timing into a key tool for long-term tax efficiency.

Special Considerations for Beneficiaries

Inherited retirement accounts follow a different set of RMD rules. Under the SECURE Act, most non-spouse beneficiaries must withdraw the full balance of an inherited IRA or 401(k) within 10 years of the original owner's death. This is known as the 10-year rule.

Spouses, however, retain more flexibility. They may roll the account into their own IRA, continue it as an inherited IRA, or delay distributions depending on age and income needs. Each option has unique tax consequences, so beneficiaries should review them carefully to remain compliant and optimize outcomes.