Required Minimum Distributions (RMDs): How They Work

Required minimum distributions solve a tax problem rather than a retirement-spending problem.

Tax-deferred retirement accounts can postpone federal income tax for decades. RMD rules eventually require money to begin leaving many of those accounts so taxable amounts cannot remain deferred indefinitely.

The amount you are required to withdraw is not necessarily the amount you should spend. You can need more than the RMD to fund your retirement budget, or you can receive an RMD that is larger than the cash you actually need.

Understanding that distinction makes the rules much easier to fit into a broader retirement-income plan.

Which Retirement Accounts Require RMDs?

RMD rules apply broadly to tax-deferred retirement arrangements.

Beneficiary rules are different. A Roth account can have no lifetime RMD for its original owner and still become subject to distribution rules after the owner dies.

This article focuses primarily on RMDs for original account owners. Inherited retirement accounts can follow separate beneficiary timelines and should not be calculated using the owner’s ordinary RMD worksheet without checking the applicable inherited-account rules.

When Do RMDs Start?

Under current federal rules, the general RMD starting age is 73.

SECURE 2.0 raised the applicable age to 73 beginning in 2023 and schedules a further increase to age 75 beginning in 2033.

The exact beginning date also depends on the account type.

Traditional, SEP, and SIMPLE IRAs

For an IRA owner subject to the current age-73 rule, the first RMD is for the calendar year in which the owner reaches 73. The first distribution can be delayed until April 1 of the following year.

Continuing to work does not generally postpone RMDs from your own Traditional, SEP, or SIMPLE IRAs.

401(k), 403(b), and Other Workplace Plans

Many participants in employer retirement plans can delay the first RMD until after retirement when the plan permits it. IRS rules do not provide that still-working delay to a person who owns more than 5% of the business sponsoring the plan.

The plan document can also require distributions earlier than the latest date federal law would otherwise permit, so check the plan rather than assuming employment automatically delays the RMD.

How to Calculate an RMD

For a typical original owner, the annual calculation is:

Most original owners use the Uniform Lifetime Table in IRS Publication 590-B.

A different table applies when your spouse is your sole beneficiary and is more than 10 years younger than you. Beneficiaries of inherited accounts can use a different life-expectancy table under the rules that apply to them.

Your custodian may calculate an IRA RMD for you, and a workplace plan administrator can provide its required amount. IRS nevertheless places responsibility for taking the correct amount on the account owner.

Check the year-end balance and calculation rather than assuming an automated distribution is always correct after a rollover, account transfer, beneficiary change, or other unusual transaction.

The First RMD Deadline Can Put Two Withdrawals in One Year

The first RMD receives a special timing option.

You generally may take the first RMD by December 31 of the year for which it is required or delay that first distribution until April 1 of the following calendar year.

The second RMD does not receive the same delay. It is due by December 31 of that following year.

Taking two taxable distributions in one year can increase taxable income compared with taking the first RMD during Year 1.

That does not mean everyone should take the first RMD early. Tax deductions, charitable plans, other income, state taxes, Medicare-related income calculations, and the size of each distribution can change the result.

The important point is to model both calendar years before automatically choosing the April 1 delay.

Multiple IRAs and 401(k)s Have Different Aggregation Rules

Owning several retirement accounts makes RMD administration more complicated because the IRS does not let every account type be combined in the same way.

Traditional, SEP, and SIMPLE IRAs

Calculate the RMD separately for each IRA. You can then generally add those IRA RMDs together and take the total from one IRA or from any combination of the IRAs.

403(b) Contracts

IRS similarly allows RMD amounts calculated separately for multiple 403(b) contracts to be aggregated and withdrawn from one or more of those 403(b) contracts, subject to the applicable rules.

401(k) and 457(b) Plans

RMDs from other workplace plans such as 401(k) and 457(b) plans generally must be taken separately from each plan account.

You cannot normally satisfy a $10,000 RMD from one 401(k) simply by withdrawing an extra $10,000 from your Traditional IRA.

How RMDs Are Taxed

An RMD does not receive a special federal income-tax rate merely because it is required.

Previously untaxed amounts distributed from Traditional IRAs and pre-tax retirement plans are generally included in taxable income. If an account includes after-tax basis, part of a distribution can be nontaxable under the applicable rules.

You can generally have federal income tax withheld from retirement distributions, or you may need estimated tax payments depending on the rest of your income and withholding.

RMDs can interact with other retirement income such as:

• Social Security;
• pensions;
• taxable investment income;
• employment or business income;
• Roth conversions; and
• other retirement-account distributions.

That is why RMD planning starts before the first mandatory withdrawal for some retirees. A large pre-tax balance can create substantial taxable distributions later even when the retiree does not need the cash for spending.

RMDs themselves generally are not eligible rollover distributions. You cannot take a required distribution and then put that same RMD amount back into another tax-deferred retirement account as a rollover.

You Do Not Have to Spend an RMD

The federal rule requires a distribution from the retirement account. It does not require consumption.

If the RMD is larger than your retirement spending need, you can generally use the after-tax proceeds for another purpose, such as:

• adding cash to a taxable savings account;
• investing in a taxable brokerage account;
• funding a planned purchase;
• helping family;
• making charitable gifts; or
• covering future expenses.

For IRA owners who qualify, a qualified charitable distribution (QCD) can also be important. IRS rules allow eligible individuals age 70½ or older to direct qualifying IRA distributions to eligible charitable organizations, and a QCD can count toward the IRA’s RMD for the year when the requirements are met.

A QCD must follow specific rules, including payment directly from the IRA trustee to the eligible charity. Do not first withdraw the money personally and assume a later donation automatically receives QCD treatment.

If charitable giving is already part of your retirement plan, review QCD rules before taking the year’s RMD because the order of transactions can matter.

What Happens If You Miss an RMD?

If you fail to withdraw the full required amount by the deadline, the shortfall can be subject to an excise tax.

Under current IRS rules:

• the general excise tax is 25% of the amount not distributed as required;
• the rate can be reduced to 10% when the shortfall is corrected within the applicable correction window; and
• IRS can waive the tax when the shortfall resulted from reasonable error and reasonable steps are being taken to correct it.

Form 5329 is used to report the excise tax and to request certain relief.

If you discover a missed RMD:

1. calculate the correct shortfall;
2. take the corrective distribution promptly;
3. contact the custodian or plan administrator if account records are unclear;
4. review the current Form 5329 instructions; and
5. consider professional tax help when requesting a waiver or correcting multiple years.

Do not simply add the missed amount to next year’s normal RMD and assume the problem disappears. A distribution above the required amount in one year cannot be carried forward as credit against a later year’s RMD.

Build RMDs Into the Retirement Income Plan Before They Begin

RMDs are easier to manage when they become one source in the retirement-income system rather than an unexpected year-end withdrawal.

Several years before the applicable starting age, review:

1. Pre-tax account balances. Estimate how large future mandatory withdrawals could become under current rules.
2. Expected taxable income. Include Social Security, pensions, investment income, and other distributions.
3. Your account structure. Know which IRAs can be aggregated and which workplace plans require separate RMDs.
4. Charitable plans. If you already give to charity, determine whether QCD rules may fit once eligible.
5. Withdrawal sequencing. Earlier voluntary withdrawals or Roth conversions can change future pre-tax balances, but the current tax cost must be compared with the potential future benefit.
6. Cash needs. Decide whether the RMD will fund ordinary spending or whether some of the after-tax distribution will be reinvested.
7. The first-year deadline. Compare taking the first RMD in the initial year with delaying it to the following April.

The RMD is a minimum distribution rule, not a retirement strategy by itself. Your broader retirement-account withdrawal order determines how mandatory distributions fit with taxable and Roth money.

A retiree who needs more income can withdraw more. A retiree who needs less can satisfy the distribution and reinvest the after-tax excess. The broader goal is to coordinate the mandatory withdrawal with taxes, spending, investments, and other retirement income rather than letting an IRS deadline determine the rest of the financial plan.