At 73, you’ve reached a significant milestone, which is a result of a lifetime of hard work, planning, and perseverance. Congratulations! However, this particular birthday also comes with an essential financial responsibility: calculating and taking your Required Minimum Distributions (RMD).
For decades, you have diligently saved in tax-deferred retirement accounts, such as traditional IRAs, 401(k)s, and 403(b)s. Over time, your money compounded beautifully without being taxed. In a nutshell, RMDs are the IRS’s way of saying, “It’s time to pay the piper.” They’re mandatory withdrawals intended to make sure the government eventually pays taxes on the money that has grown tax-free. Although the fundamental concept of RMDs may seem straightforward, the rules, calculations, and strategic implications can be quite complex.
To maximize your retirement income, you need to navigate RMDs correctly to avoid penalties. This post will provide you with everything you need to stay compliant, increase your withdrawals, and maintain your financial peace of mind.
What Exactly Is an RMD, and Which Accounts Are Affected?
A Required Minimum Distribution (RMD) is the minimum amount that must be withdrawn from your retirement account every year after you reach a certain age. In general, the average age is 73, but it is expected to rise to 75 by 2033. To ensure that taxes on retirement assets are paid, the Internal Revenue Service (IRS) requires these withdrawals.
Generally, RMDs are required for pre-tax or tax-deferred accounts where contributions were made without immediate taxation. Among them are;
- Traditional IRAs. An individual retirement account that is tax-deferred.
- SEP IRAs. A Simplified Employee Pension plan is typically for self-employed individuals or small businesses.
- SIMPLE IRAs. Another retirement plan option for small businesses is the Savings Incentive Match Plan for Employees (SIMPLE).
- Employer-sponsored retirement plans. These include 401(k)s, 403(b)s (for nonprofit organizations and public schools), and 457 (b) s (for state and local government employees).
It is essential to note that Roth IRAs are exempt from required minimum distributions (RMDs) during the lifetime of the original account holder. As a result, if you don’t want to take money out of your Roth IRA, it will continue growing tax-free for your beneficiaries. Furthermore, Roth 401(k)s are now exempt from RMDs for the original owner, effective January 1, 2024, making them comparable to Roth IRAs. For many people, this is a welcome change, as Roth 401(k)s were subject to RMDs prior to 2024.
When Do You Really Have to Start Taking RMDs? The April 1st Rule
To comply with the RMD deadline, you must understand it. After you turn 73, you must take your first RMD by April 1st. Every subsequent RMD must be taken by December 31 of the calendar year following the initial deadline.
To illustrate, let’s use a current example. Let’s say you turn 73 in 2025:
- By April 1, 2026, you’ll have to pay your very first RMD based on your account balance at the end of 2024.
- The second RMD must be taken by December 31, 2026, based on your account balance at the end of 2025.
Did you notice the overlap? By delaying your first RMD until April 1st of the following year, you will end up taking two distributions in one calendar year. As a result of this “double distribution,” your taxable income can become significantly higher for that year, which may increase your tax bracket, result in taxation of your Social Security benefits, and even lead to higher Medicare premiums (known as IRMAA surcharges). If your unique situation permits, it’s generally advisable to take your first RMD by December 31st of the year you turn 73.
How Are RMDs Calculated? Understanding the Divisor
Calculating your RMD isn’t as complicated as it seems. You can use the IRS’s “life expectancy tables” to calculate how much you should withdraw. In most cases, the Uniform Lifetime Table is used.
In a simplified calculation, you divide your account balance (at the end of the previous year) by the “distribution period” (or “divisor”) assigned to your age.
For a hypothetical person turning 73 in 2025 and taking their RMD in 2025, let’s look at the following:
- Your IRA balance on December 31, 2024, was $500,000.
- The IRS divisor for age 73 (from the Uniform Lifetime Table) is 26.5.
- Your RMD for 2025 = $500,000 ÷ 26.5 = $18,867.92.
It’s important to note that if your spouse is over 10 years younger than you and is the sole beneficiary of your IRA, you must use a different IRS table (the Joint Life and Last Survivor Expectancy Table). As a result of the longer life expectancies provided by this table, RMDs are smaller, so tax deferral benefits are possible.
Also, you typically receive a notification every year from your IRA custodian (e.g., Fidelity, Vanguard, Schwab) with the amount of your RMD. It provides valuable insight, however, to understand the mechanics.
The High Cost of Missing an RMD: Penalties You Want to Avoid
A failure to take all of your RMDs by the deadline can result in substantial penalties from the IRS.
As of 2023, failing to take an RMD will result in a 25% penalty. Therefore, if you forgot to take your RMD and it was $20,000, a $5,000 penalty could apply.
The SECURE Act 2.0 does, however, offer a potential reduction in this penalty. If the mistake is corrected “timely” (generally within two calendar years following the error), the penalty may be reduced to 10%.
To resolve a missed RMD and request a penalty waiver, follow these steps;
- Take the missed RMD. Once you realize the mistake, withdraw the full amount.
- File IRS Form 5329. For qualified plans, this form is used to report additional taxes.
- Include a letter of explanation. Include a letter in Form 5329 detailing what steps you took to correct the missed RMD. In some cases, the IRS may waive the penalty if the failure can be proven to have been caused by a “reasonable cause” (for instance, a death in the family, a mistake by your financial institution).
Regardless of whether the IRS waives the penalty, you will still owe ordinary income tax on the withdrawal amount.
Can You Take More Than the Minimum? Yes, But Be Strategic
The “Required Minimum Distribution” is exactly that — a minimum. If you want to withdraw more than the calculated RMD amount from your traditional IRA or 401(k), you can do so at any time. Withdrawing above the RMD from pre-tax accounts, however, will be taxable income (unless you have a “basis” from non-deductible contributions, which is rare).
In certain situations, it may make sense to take more than your RMD;
- Low-income years. Suppose you find yourself in a year with unusually low taxable income (e.g., you retired early, or before Social Security or a pension started). In that case, you might want to take more than your required minimum distribution to “fill up” lower tax brackets, effectively paying lower tax now than later.
- Living expenses. To cover your living expenses, simply withdraw more than your RMD.
- Funding Roth conversions (before 73). Even though RMDs cannot be converted to Roth accounts, taking withdrawals before your RMD age can help you pay taxes on Roth conversions, effectively shrinking your pre-tax balances before RMDs apply.
To avoid getting into an unnecessary tax bracket or being charged the Medicare surcharges, avoid withdrawing too much.
Satisfying RMDs with Multiple Accounts: The Aggregation Rule
If you manage RMDs from multiple retirement accounts, you must understand the following rules;
- IRAs (Traditional, SEP, SIMPLE). When you have multiple IRA accounts, you calculate RMDs separately for each. You may, however, sum up all your RMD payments and withdraw the total from any one or combination of your IRAs. As an example, if you have three IRAs, you calculate RMDs for each, add them up, and then you can take the entire aggregate RMD from just one or split it among them.
- 401(k)s and other employer plans. The situation is different here. If you have multiple 401(k) plans from former employers, you must calculate and take the required minimum distribution (RMD) separately for each plan. It’s not possible to aggregate them. For example, if you have two 401(k) plans, you must withdraw the required minimum distribution (RMD) from each. Due to this, many retirees choose to consolidate their old 401(k)s into a single IRA to simplify the process of taking Required Minimum Distributions (RMDs).
Still Working? The “Still-Working” Exception for 401(k)s
When you’re 73 (or older) and still employed, you might be able to delay RMDs from your current employer’s 401(k) until you retire. As long as you own less than 5% of the company, you qualify for the “still-working” exception.
For high earners who want to continue deferring taxes on their workplace plan contributions and growth, this can be a valuable benefit. There are, however, two caveats to keep in mind;
- IRAs are not included in this exception. No matter what your employment status is, you must still take RMDs from your traditional IRAs when you reach age 73.
- In addition, this exception does not apply to 401(k) plans from former employers. If you have contributed to any previous employer’s 401(k) plan (other than an IRA), you must begin taking RMDs.
Qualified Charitable Distributions (QCDs): Your Tax-Smart Gifting Option
QCDs are a powerful tax-planning tool for charitably inclined retirees who may not need their RMD for living expenses. Your IRA can be directly transferred directly to a qualified public charity if you are at least 70 ½ years old.
In addition to counting toward your RMD requirement for the year, QCDs are not taxed. As a result, it differs from a regular IRA withdrawal, which would be taxable.
There are several advantages to using a QCD, including;
- Reduced adjusted gross income (AGI). Your AGI is lower since the QCD is not included in your income.
- Lower Medicare premiums. If you have a lower AGI, you may be able to avoid or reduce Medicare’s IRMAA surcharges.
- Less tax on Social Security. Having a lower AGI can also reduce the federal income tax that is applied to your Social Security benefits.
- Fulfilling charitable goals. It is possible to contribute to causes you care about in a tax-efficient manner.
To qualify, the distribution must be made directly from your IRA custodian to the designated charity. Also, having withdrawn the money yourself, you cannot donate it later.
Should You Automate Your RMDs? Convenience vs. Control
Financial custodians, such as Fidelity, Vanguard, and Charles Schwab, among others, offer automation options for RMDs. Additionally, you can specify tax withholding amounts when scheduling withdrawals.
Pros of automation;
- Convenience. “Set it and forget it” makes meeting deadlines easy.
- Penalty avoidance. Maintains compliance to avoid costly IRS penalties.
- Steady income stream. Throughout the year, cash flow is predictable.
Cons/cautions of automation;
- Loss of flexibility. Depending on fluctuating income or tax laws, you might miss the opportunity to time withdrawals strategically.
- Incorrect withholding. Automated withholding can be incorrect if your tax situation changes, resulting in a surprise tax bill or refund.
- Annual review needed. Regardless of automation, you should review your RMD amount and withdrawal strategy annually as your account balance changes and tax laws change.
Generally, automating RMDs provides peace of mind; however, it’s essential to evaluate your overall tax and income strategy annually.
Strategic Planning Around RMDs: A Holistic View
While understanding RMDs on their own is useful, mastering retirement finances requires integrating them into your overall financial plan.
- Roth conversions (pre-RMD strategy). By converting traditional IRA funds to Roth accounts before you receive your RMDs, you are reducing future RMDs and creating a tax-free income stream. During “tax valleys” (e.g., between working and claiming Social Security), this is especially appealing.
- Social Security coordination. As a result of your RMDs, your adjusted gross income (AGI) will increase. Social Security benefits are more likely to be taxable as your AGI increases. Make sure you plan your RMDs and other income sources in conjunction with your Social Security claim.
- Medicare IRMAA avoidance. In addition to triggering Income-Related Monthly Adjustment Amounts (IRMAA) for your Medicare Part B and Part D premiums, RMDs have other significant effects. Based on your Modified Adjusted Gross Income from two years ago, these surcharges are calculated. For example, your 2025 Medicare premiums will be based on your 2023 MAGI. Taking RMDs can push your MAGI over a threshold, driving your premiums up significantly. To avoid these cliffs, multi-year planning of all taxable income, including RMDs, is a must.
- Withdrawal order strategy. Keeping your taxable income in a low bracket and minimizing Required Minimum Distributions (RMDs) can be accomplished by strategically blending withdrawals from traditional, taxable, and Roth accounts.
Final Thoughts
As you reach 73, Required Minimum Distributions become a part of your financial life. Even though RMDs are an unavoidable part of retirement income, they don’t have to be stressful or taxing.
If you plan carefully, understand the rules, and integrate RMDs into your broader retirement income strategy, you can minimize taxes, avoid penalties, and maximize your retirement savings. To take control of your situation, you can automate the process, utilize Qualified Charitable Distributions, or meticulously plan your withdrawals.
As the financial landscape evolves, so do tax laws. Whenever in doubt, or if your situation is particularly complicated, consult a qualified financial advisor or tax professional. Taking some proactive steps today can make your retirement more efficient, more enjoyable, and truly worry-free.
FAQs
What happens if I don’t take my required minimum distribution (RMD) on time?
Failing to meet your RMD deadline can be costly. In general, you will be penalized 25% of the amount you should have withdrawn. However, if the mistake is corrected promptly (usually by the end of the second calendar year following the missed RMD), the penalty can be reduced to 10%. If you withdraw the amount as scheduled, you’ll still owe income tax. To rectify the oversight, you should file IRS Form 5329, explaining the reason for the error, as soon as possible.
Can I use my RMD money for any purpose I choose?
As soon as you withdraw your RMD from a traditional IRA or 401(k), it becomes taxable income for that year, and you may use it as you see fit. In addition to covering living expenses, it can also be reinvested in a taxable brokerage account (although future capital gains or dividends will be taxed).
Does taking my RMD affect my Medicare premiums?
Potentially, yes.
A Medicare Part B and Part D premium is based on your modified adjusted gross income (MAGI) from two years ago. As RMDs are taxable income, they increase the Modified Adjusted Gross Income (MAGI). Depending on your MAGI, you may be subject to Income-Related Monthly Adjustment Amounts (IRMAA), which means you’ll have to pay higher monthly Medicare premiums. To avoid these surcharges, you must plan your taxable income (including RMDs).
Can I roll my RMD into a Roth IRA?
No. A Roth IRA cannot be converted or rolled over directly into a required minimum distribution (RMD).
You must first withdraw the RMD amount from your traditional tax-deferred account. After that amount is withdrawn and is counted as income, you can convert any remaining pre-tax funds (beyond your RMD) into a Roth IRA, paying taxes on the conversion in the year it is made.
I have multiple retirement accounts. How do I manage RMDs across them?
There are different rules for different types of accounts. In traditional IRAs (including SEP and SIMPLE IRAs), RMDs are calculated for each account individually, but the total can then be withdrawn from any of your IRA accounts. However, you must calculate and take RMDs separately from each of your employer-sponsored plans, such as 401(k)s, 403(b)s, and 457s. Therefore, many retirees consolidate their old 401(k)s into a single IRA to simplify their required minimum distributions (RMDs).
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