Understanding Required Minimum Distributions and Taxes

What Required Minimum Distributions Are and Why They Matter

A Required Minimum Distribution (RMD) is the smallest amount of money you must withdraw each year from certain retirement accounts. The Internal Revenue Service (IRS) requires these withdrawals to ensure that people eventually pay income taxes on the money they saved in tax-deferred retirement accounts. If you have a traditional Individual Retirement Account (IRA), a 401(k), a 403(b), or similar retirement savings account, you will likely need to take RMDs at some point in your life.

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The purpose of RMDs is straightforward: when you contribute to traditional retirement accounts, you typically receive a tax break that year. The government lets you defer paying taxes until you withdraw the money later. RMDs are the government's way of making sure that by the time you reach a certain age, you start taking money out and paying the taxes that were deferred for decades.

Understanding RMDs matters because failing to take them comes with significant financial consequences. If you do not withdraw the required amount, the IRS imposes a penalty tax of 25% on the amount you should have withdrawn but did not. This penalty was reduced from 50% in 2023 as part of the SECURE 2.0 Act, but it remains a substantial cost. For example, if you should have withdrawn $10,000 but withdrew nothing, you would owe a $2,500 penalty on top of regular income taxes.

RMDs apply to most tax-deferred retirement accounts, but not all accounts trigger these requirements. Roth IRAs, for instance, do not require withdrawals during the account owner's lifetime. Health Savings Accounts (HSAs) also do not have RMDs as long as you are still working and covered by a high-deductible health plan. Understanding which accounts require distributions helps you plan your retirement income strategy.

Practical Takeaway: RMDs are mandatory annual withdrawals from retirement accounts, not optional. The penalty for missing an RMD is steep, so knowing whether you have accounts subject to these rules is the first step in avoiding costly mistakes.

When RMDs Begin: Age Requirements and Starting Points

The age at which you must start taking RMDs changed under the SECURE Act, which became law on January 1, 2020. For people born in 1950 or earlier, RMDs began at age 70½. However, the SECURE Act delayed the starting age for younger people. If you were born between 1951 and 1959, your RMD starting age is 73. If you were born in 1960 or later, you must begin RMDs at age 75.

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The year you turn the required age is called your "initial distribution year." You have two options for taking your first RMD. You can withdraw it by December 31 of the year you reach the required age, or you can wait until April 1 of the following year. This April 1 deadline is called the "required beginning date." However, if you choose to wait until April 1, you will owe two years' worth of RMDs that same year—one for the year you turned the required age and one for the current year. This double withdrawal could push you into a higher tax bracket.

For example, consider someone born in 1952 who reaches age 73 in 2025. They can take their first RMD by December 31, 2025, which is simpler and often better for tax planning. Alternatively, they could wait and take it by April 1, 2026, but then they would need to take the 2025 RMD and the 2026 RMD in 2026, resulting in a larger lump sum withdrawal that year.

After your first RMD, you must continue taking distributions every year. Subsequent RMDs must be taken by December 31 each year. There are no exceptions or deferrals once you begin—you must take an RMD every single calendar year going forward, even if you do not need the money or are still working.

Practical Takeaway: Your RMD starting age depends on your birth year, ranging from 70½ to 75. Plan your first withdrawal strategically, as waiting until April 1 means taking two years of distributions in one year, which can increase your taxes.

Calculating the Amount You Must Withdraw

The IRS uses a formula to calculate how much you must withdraw each year. The formula divides your account balance by a life expectancy factor. The IRS publishes life expectancy tables that assign numbers based on your age. The most commonly used table is the Uniform Lifetime Table, which applies to most people. Another table, the Joint and Last Survivor Table, applies if your spouse is more than 10 years younger than you and is the sole beneficiary of your IRA.

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Here is how the calculation works in practice. Suppose you are 75 years old with an IRA balance of $300,000 as of December 31 of the previous year. According to the Uniform Lifetime Table published by the IRS, the life expectancy factor for age 75 is 24.6. You divide your account balance by this factor: $300,000 ÷ 24.6 = $12,195. This amount is your RMD for the year.

The date you measure your account balance matters: December 31 of the prior year is the date used to calculate RMDs. This is called the "valuation date." If you have multiple IRAs, you calculate the RMD for each account separately, but you can withdraw the total combined amount from any one or more of your IRAs. However, this aggregation rule only applies to IRAs. If you have a 401(k) and an IRA, you must calculate and withdraw the RMD from each account separately.

If you have several retirement accounts at different financial institutions, you need to track each one carefully. Many people have forgotten about old 401(k) accounts from previous employers or IRAs opened years ago. Failure to withdraw from all accounts subject to RMD rules will result in a penalty, even if you withdrew the correct total amount from other accounts.

The IRS provides worksheets and tables to help with RMD calculations. Many financial institutions also calculate RMDs for their customers and send a notice showing the required amount. However, the responsibility to calculate and take the correct RMD ultimately rests with you. Working with an accountant or financial professional can reduce the risk of calculation errors.

Practical Takeaway: Divide your December 31 account balance by your age-based life expectancy factor to calculate your RMD. If you have multiple accounts, calculate each separately—except for IRAs, which can be aggregated. Track all old retirement accounts to avoid missing an RMD.

Tax Consequences and How RMDs Affect Your Tax Bill

RMDs are taxed as ordinary income in the year you withdraw them. This means the money you withdraw gets added to all your other income—wages, Social Security, pensions, investment gains—and taxed at your applicable tax rate. If you are in the 24% federal tax bracket, withdrawing $12,000 in RMDs adds $12,000 of taxable income. In many cases, this increases your overall tax liability by roughly 24% of the RMD amount, plus any state income taxes if you live in a state that taxes income.

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One significant tax consequence of RMDs is their effect on other benefits and income thresholds. Higher income from RMDs can push you into a higher tax bracket, increase the taxable portion of Social Security benefits, or reduce your eligibility for certain credits. For example, under current rules, if your combined income (adjusted gross income plus half your Social Security benefits) exceeds certain thresholds, up to 85% of your Social Security becomes taxable instead of remaining tax-free. An unexpected large RMD could trigger this effect.

RMDs also affect Medicare premiums through Income-Related Monthly Adjustment Amounts (IRMAA). Medicare looks at your modified adjusted gross income from two years prior to determine your Part B and Part D premiums. A large RMD could increase this income and cause your Medicare premiums to rise. This increase remains in effect until your income drops below the threshold again, so the effect can last several years.

If you have not paid taxes throughout the year on your RMD, you may owe a large tax