What Are Required Minimum Distributions?
Required Minimum Distributions (RMDs) are mandatory withdrawals from tax-deferred retirement accounts that the IRS requires once you reach a certain age. These rules exist because the government wants to collect taxes on money that has been growing tax-free in accounts like traditional IRAs and 401(k)s.
Think of RMDs as the government's way of saying, "You've enjoyed tax-deferred growth long enough—now it's time to pay taxes on some of that money."
When Do RMDs Begin?
Under current rules, you must start taking RMDs by April 1st of the year following the year you turn 73. This age was increased from 72 in 2023 as part of the SECURE Act 2.0.
Example: If you turn 73 in 2026, you must take your first RMD by April 1, 2027. However, if you delay your first RMD until the following year, you'll need to take two distributions that year—one for the previous year and one for the current year, which could push you into a higher tax bracket.
Which Accounts Require RMDs?
RMDs apply to most tax-deferred retirement accounts:
- Traditional IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Traditional TSP accounts
- SEP-IRAs and SIMPLE IRAs
Important exception: Roth IRAs do not require RMDs during the original owner's lifetime, since contributions were made with after-tax dollars.
How Are RMDs Calculated?
RMD calculations use a simple formula:
Account Balance ÷ Life Expectancy Factor = Required Minimum Distribution
The IRS provides life expectancy tables that determine your factor based on your age. The most commonly used is the Uniform Lifetime Table.
Example calculation:
- Account balance on December 31, 2025: $500,000
- Age 75 life expectancy factor: 24.6
- RMD for 2026: $500,000 ÷ 24.6 = $20,325
Your account custodian (bank, brokerage, etc.) typically calculates this amount for you and will send annual notices.
Multiple Account Strategy
If you have multiple IRAs, you can calculate the RMD for each account separately, then withdraw the total amount from any combination of your IRAs. However, 401(k) RMDs must be taken separately from each 401(k) account.
Strategic tip: This flexibility allows you to choose which investments to sell, potentially preserving your better-performing assets while liquidating underperformers.
Tax Implications
RMDs from traditional retirement accounts are taxed as ordinary income at your current tax rate. This can significantly impact your annual tax bill, especially if the distribution pushes you into a higher tax bracket.
Planning consideration: If you're still working at age 73, the additional RMD income combined with your salary could result in substantial tax consequences.
Penalties for Missing RMDs
The penalty for failing to take your full RMD is severe: 25% of the amount you should have withdrawn but didn't. Under SECURE Act 2.0, this penalty can be reduced to 10% if you correct the mistake promptly.
Example: If your RMD was $20,000 but you only withdrew $15,000, you'd owe a penalty of $1,250 (25% of the $5,000 shortfall) unless you qualify for the reduced penalty.
Smart RMD Strategies
Start planning early: Consider taking distributions before age 73 if you're in a lower tax bracket, especially in early retirement years.
Qualified Charitable Distribution (QCD): If you're charitably inclined, you can donate up to $100,000 directly from your IRA to qualified charities. This counts toward your RMD but isn't included in your taxable income.
Asset location: Keep growth investments in Roth accounts (no RMDs) and more conservative investments in traditional accounts subject to RMDs.
Roth conversions: Before RMDs begin, consider converting some traditional IRA money to Roth IRAs during lower-income years.
Key Takeaways
RMDs are a critical component of retirement planning that requires attention and strategy. Start planning several years before age 73, understand which accounts are affected, and consider how RMDs will impact your overall tax situation. When in doubt, consult with a tax professional or financial advisor to ensure you're meeting requirements while minimizing tax impact.
Remember: RMDs are the minimum you must withdraw—you can always take more if your financial situation warrants it.