Required Minimum Distribution (RMD)

A Required Minimum Distribution is the minimum amount the IRS requires you to withdraw annually from tax-deferred retirement accounts like traditional IRAs and 401(k)s after reaching a certain age. Under the SECURE 2.0 Act, RMDs generally begin at age 73, increasing to age 75 for those born in 1960 or later. Failing to take your full RMD can result in a significant excise tax penalty on the shortfall.

Required Minimum Distributions exist because the government granted tax-deferred growth on retirement contributions with the expectation that those funds would eventually be taxed as income. Once you reach the applicable RMD age, the IRS uses life expectancy tables to calculate the minimum amount you must withdraw each year from accounts such as traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and 457(b) plans.

The RMD amount is determined by dividing your account balance as of December 31 of the prior year by a life expectancy factor from the IRS Uniform Lifetime Table (or the Joint Life and Last Survivor Expectancy Table if your sole beneficiary is a spouse more than 10 years younger). As you age, the life expectancy factor decreases, which generally means your RMD amount increases over time relative to your account balance.

The SECURE 2.0 Act of 2022 made notable changes to RMD rules. Individuals born between 1951 and 1959 must begin RMDs at age 73, while those born in 1960 or later may not need to begin until age 75. Additionally, the penalty for failing to take an RMD was reduced from 50% to 25% of the shortfall, and can drop to 10% if corrected within a timely manner.

It is worth noting that Roth IRAs do not require RMDs during the original owner's lifetime, though Roth accounts within employer-sponsored plans were previously subject to RMDs. Starting in 2024, designated Roth accounts in 401(k) and 403(b) plans are also exempt from RMDs. Understanding how RMDs interact with your overall tax picture may help you plan withdrawals more strategically.

Why This Matters

RMDs can significantly affect your taxable income in retirement, potentially pushing you into a higher tax bracket, increasing Medicare premiums through IRMAA surcharges, or making more of your Social Security benefits taxable. Planning ahead for RMDs may help you explore strategies like Roth conversions in lower-income years or qualified charitable distributions to manage the tax impact.

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