What Are Required Minimum Distributions? RMDs Explained

Required minimum distributions are the government's way of ensuring that tax-deferred retirement accounts eventually get taxed. After years or decades of contributing to a traditional 401(k) or IRA and watching it grow tax-free, you're required to start withdrawing — and paying income tax on — a portion of those accounts each year once you reach a certain age.

RMDs catch many retirees off guard. The required withdrawal can be larger than expected, pushing you into a higher tax bracket and increasing taxes on Social Security benefits. Understanding how RMDs work — and planning for them years in advance — can save you thousands in unnecessary taxes.

When RMDs Begin

Under current law (as updated by SECURE 2.0), RMDs begin at age 73. This means you must take your first distribution by April 1 of the year after you turn 73. Subsequent RMDs must be taken by December 31 of each year. If you delay your first RMD to April 1, you'll take two distributions in the same calendar year — your delayed first RMD plus your regular second-year RMD — which can create a significant tax spike.

RMDs apply to traditional IRAs, traditional 401(k)s, 403(b)s, 457 plans, and most other tax-deferred retirement accounts. They do not apply to Roth IRAs during the account owner's lifetime — one of the Roth's most valuable features. Inherited retirement accounts have their own distribution rules, typically requiring full distribution within ten years for non-spouse beneficiaries.

How RMDs Are Calculated

Your annual RMD is calculated by dividing your account balance (as of December 31 of the prior year) by a life expectancy factor from IRS tables. At age 73, the divisor is approximately 26.5, meaning your RMD is roughly 3.8% of your account balance. The divisor decreases each year, so the required percentage increases as you age — by age 80, it's roughly 5.3%, and by 90, roughly 8.2%.

If you have multiple traditional IRAs, you calculate the RMD for each account separately but can take the total from any one or combination of your IRAs. 401(k) RMDs, however, must be taken from each 401(k) individually — you can't satisfy one plan's RMD from another.

The penalty for missing an RMD is severe: 25% of the amount you should have withdrawn (reduced from the previous 50% penalty by SECURE 2.0). If you catch the mistake and correct it promptly, the penalty drops to 10%. Given these stakes, setting calendar reminders and working with your account custodian to automate RMDs is well worth the effort.

The Tax Impact of RMDs

RMDs are taxed as ordinary income. A $50,000 RMD is added to your other income and taxed at your marginal rate. For retirees with large traditional retirement accounts, RMDs can be substantial — a $2 million IRA requires an initial RMD of roughly $75,000, which alone puts a single filer well into the 22% bracket before any other income.

RMDs interact with Social Security taxation. Social Security benefits are taxed based on "combined income" — a formula that includes half of your Social Security benefits plus your other income, including RMDs. Large RMDs can push you into the range where up to 85% of your Social Security benefits become taxable, effectively increasing your marginal tax rate beyond what the bracket alone would suggest.

RMDs can also trigger the Net Investment Income Tax (3.8% surtax on investment income above certain thresholds) and increase your Medicare premiums through Income-Related Monthly Adjustment Amounts (IRMAA). These cascading effects mean the true cost of a large RMD extends well beyond the stated tax bracket.

Strategies to Minimize RMD Impact

Roth conversions before RMDs begin are the most powerful mitigation strategy. Every dollar converted from a traditional IRA to a Roth in your fifties or sixties is a dollar that won't be subject to RMDs later. The tax you pay on the conversion is likely lower than the tax you'd pay on the RMD — especially if you convert during low-income years between retirement and age 73.

Qualified Charitable Distributions (QCDs) allow you to donate up to $105,000 per year directly from your IRA to charity. The distribution counts toward your RMD but isn't included in your taxable income. If you're charitably inclined, QCDs are one of the most tax-efficient giving strategies available — you satisfy your RMD, support your chosen causes, and avoid paying tax on the distribution.

Spending down traditional accounts in early retirement — before RMDs force the issue — gives you control over the timing and amount of distributions. Taking voluntary distributions in your sixties at lower tax rates, rather than waiting for larger mandatory distributions at 73, can significantly reduce your lifetime tax bill.

RMDs and Your Investment Strategy

Knowing that RMDs will force annual distributions should inform where you hold different types of investments. Tax-inefficient investments — bonds paying taxable interest, REITs with ordinary income distributions — are better held in Roth accounts where they'll never face RMDs. Tax-efficient investments — stocks with qualified dividends and long-term growth potential — can be held in traditional accounts, where the forced distributions are taxed at favorable rates.

The ultimate goal is to minimize the amount in traditional accounts subject to RMDs while maximizing the amount in Roth accounts and taxable accounts that you control. Starting this repositioning in your fifties gives you decades to execute efficiently, rather than facing a tax cliff at 73.