Required Minimum Distributions: What You Need to Know

You've spent decades contributing to tax-deferred retirement accounts. The IRS let that money grow untaxed, but they want their cut eventually. Required Minimum Distributions (RMDs) force you to withdraw from these accounts and pay taxes, whether you need the money or not. Here's what you need to know.

What Are RMDs?

RMDs are mandatory annual withdrawals from tax-deferred retirement accounts. The government gave you a tax break on contributions; RMDs ensure you eventually pay taxes on that money.

Accounts subject to RMDs:

• Traditional IRAs
• 401(k), 403(b), 457(b) plans
• SEP IRAs and SIMPLE IRAs
• Inherited IRAs (different rules apply)

Accounts NOT subject to RMDs (during your lifetime):

• Roth IRAs (but inherited Roth IRAs have RMDs)
• Roth 401(k)s, starting in 2024, these no longer have RMDs

When Do RMDs Begin?

Thanks to recent legislation, RMD ages have increased:

• Born 1950 or earlier: RMDs began at 70½
• Born 1951-1959: RMDs begin at 73
• Born 1960 or later: RMDs begin at 75 (starting in 2033)

First-year timing: Your first RMD must be taken by April 1 of the year after you reach RMD age. Subsequent RMDs are due by December 31 each year.

How to Calculate Your RMD

The calculation is straightforward:

Example: You're 75 with a $500,000 IRA balance on December 31.

RMD = $500,000 ÷ 24.6 = $20,325

You must withdraw at least $20,325 during the year and pay income tax on it.

Note: Most IRA custodians calculate your RMD for you. But it's your responsibility to ensure it's correct and taken on time.

The Penalty for Missing RMDs

Miss an RMD and you'll face a 25% excise tax on the amount not withdrawn. If you correct the error promptly (within 2 years), the penalty drops to 10%.

This penalty is steep enough that RMDs should be on every retiree's calendar. Set reminders. Don't let December 31 sneak up on you.

Strategies to Minimize RMD Impact

1. Roth Conversions Before RMD Age

Convert traditional IRA money to Roth in the years between retirement and RMD age. You'll pay taxes now, but:

• Converted money grows tax-free forever
• Roth accounts have no RMDs
• Lower traditional IRA balance = lower future RMDs

The "sweet spot" for conversions is often ages 60-72 when you may be in a lower bracket than during working years or after RMDs begin.

2. Qualified Charitable Distributions (QCDs)

If you're 70½ or older, you can transfer up to $105,000 (2025 limit) directly from your IRA to qualified charities. This counts toward your RMD but isn't included in taxable income.

If you were going to donate anyway, QCDs are almost always better than taking the RMD and donating cash.

3. Strategic Timing

If you're still working past RMD age, you may be able to delay RMDs from your current employer's 401(k) (the "still working" exception). This doesn't apply to IRAs or old 401(k)s.

4. Tax Bracket Management

If your RMD will push you into a higher bracket, consider taking distributions earlier in the year to spread out the income, or coordinate with other income (capital gains, Social Security) to minimize the bracket impact.

Multiple Accounts

IRAs: Calculate RMD for each IRA separately, but you can take the total from any one or combination of your IRAs.

401(k)s: Each 401(k) RMD must be taken from that specific account. You can't aggregate across plans.

Inherited IRAs: Must be calculated and taken separately from your own IRAs.

What to Do With RMD Money

If you don't need the RMD for living expenses, options include:

• Reinvest in taxable accounts: The money continues to grow, just in a different account
• Fund a Roth IRA: If you have earned income, you can contribute RMD money to a Roth (subject to limits)
• Give to charity: Via QCD (best) or regular donation
• Gift to family: Annual gift tax exclusion is $19,000 per recipient in 2025
• Pay for grandchildren's education: Direct payments to schools are unlimited for gift tax purposes

Planning Timeline

In your 50s-60s:

• Understand what RMDs will look like given your account balances
• Consider Roth conversions to reduce future RMDs
• Review account types (Roth vs. traditional) in your overall mix

At retirement (before RMD age):

• Execute Roth conversion strategy if appropriate
• Consider drawing down traditional accounts before RMDs force you to

Approaching RMD age:

• Understand your first RMD timing options
• Set up QCDs if you're charitably inclined
• Coordinate with your tax advisor