Your Guide to Required Minimum Distributions (RMDs)

There’s a lot that goes into financial planning for retirement, from managing your various tax obligations to ensuring your income stream is sufficient to cover your needs. As you come up with a withdrawal strategy for your retirement accounts, keep in mind that the IRS requires taxpayers to begin regularly scheduled withdrawals at age 73 (age 75 for those born in 1960 or later) from their tax-deferred accounts in the form of required minimum distributions, otherwise known as RMDs.

Understanding what your distribution requirements will be over the course of your retirement can help ensure that you don’t find yourself on the hook for a substantial tax penalty. Further, coming up with a plan ahead of time can help you manage your tax liability and provide you with more options for allocating your required distributions. Learn more about what every retiree should know about RMDs.

What Are RMDs for?

Many retirement accounts – like the majority of IRAs and 401(k)s – afford their owners tax-deferred investment growth. Contributions to these accounts are made on a pre-tax basis and the funds within them are allowed to grow tax-free until they’re withdrawn, at which point they’re subject to income taxes. By requiring minimum withdrawals, the IRS can ensure that investors eventually pay the taxes on these accounts.

Who Are RMDs for?

Under the SECURE 2.0 Act, the RMD starting age is 73 for people born between 1951 and 1959, and 75 for people born in 1960 or later. Your first RMD can be delayed until April 1 of the year after you reach that age, but doing so means taking two distributions in one tax year. Thereafter, retirees must take RMDs by December 31 each year, slowly drawing down their accounts over the course of their retirements. If you have reached RMD age but are still working, you may be able to defer RMDs from your current employer’s plan (though not from IRAs) until you actually retire, provided you own less than 5% of the company. Generally speaking, tax-deferred and employer-sponsored accounts are subject to RMD treatment. Here are the accounts with RMDs:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k) plans
• 403(b) plans
• 457(b) plans
• Profit sharing plans
• Other defined-contribution plans

Note that RMDs do not apply to Roth IRAs during the owner’s lifetime, and since 2024 they no longer apply to Roth 401(k) and Roth 403(b) accounts either. Inherited accounts follow separate rules: most non-spouse beneficiaries must empty the account within 10 years, and annual RMDs are required within that window if the original owner had already started taking them.

How Are RMDs Calculated?

The amount you must withdraw as part of your RMD is a function of your age and retirement account balance. To find your RMD, take your account’s year-end fair market value and divide it by the applicable distribution period. Your distribution period is a number prescribed by the IRS each year that’s meant to represent years of life expectancy. This means that as your age increases, the amount you must withdraw as part of your RMD also increases.

The IRS provides free worksheets to help retirees calculate their required minimum distributions, and these are updated each year to reflect changes in life expectancy. When it comes time to calculate your own RMD, be sure to consult with a financial or tax professional – or the IRS website – so that you have access to the most up-to-date resources and information.

Keep in mind that while you must make a minimum withdrawal, there’s nothing stopping you from withdrawing above that amount if you choose to. Also note that if you own more than one retirement account, you’re responsible for making RMDs from each one, and these amounts must be calculated separately.

What’s the Penalty for Missing an RMD?

If you miss the RMD deadline or forget to make one, you could face significant penalties. Failing to withdraw the required amount will result in an excise tax of 25% of the shortfall (reduced from 50% by SECURE 2.0). For example, if your RMD is $6,000 but you only withdraw $4,000, you’ll owe $500 in penalties on the $2,000 shortfall. If you correct the mistake within two years, the penalty drops to 10%, and if you missed the deadline for a reason the IRS deems legitimate, you may qualify for a full waiver by filing Form 5329 with an explanation. Give us a call to determine if you qualify for an extension.

Ways to Soften the Tax Hit

• Qualified charitable distributions. Once you are 70½, you can give up to $111,000 (2026 limit) directly from an IRA to charity. The gift counts toward your RMD and never shows up in your taxable income.
• Roth conversions before RMD age. Converting a portion of a traditional IRA in lower-income years shrinks future RMDs and the Medicare premium surcharges they can trigger.
• Withholding. You can have federal tax withheld from an RMD in lieu of making quarterly estimated payments, which simplifies tax compliance in retirement.

Make a Plan for Your RMDs

RMDs can be a challenge to deal with, but they’re nonetheless an important consideration among retirees and those planning for retirement. Understanding how these required withdrawals work and how the minimums are calculated is essential to avoid triggering unexpected penalties.

To learn more about RMDs or how to manage your retirement tax burden, schedule a call with us here.

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