If you’ve saved diligently in tax-deferred accounts—401(k)s, traditional IRAs, 403(b)s—there’s a rule you need to understand: the IRS eventually wants its share.
Required Minimum Distributions, or RMDs, are the government’s way of ensuring you don’t defer taxes forever. And while the rules have changed recently, the core concept remains the same.
The Basics
RMDs apply to most tax-deferred retirement accounts. The idea is simple: once you reach a certain age, you must start withdrawing a minimum amount each year, whether you need the money or not. That withdrawal is taxed as ordinary income.
Miss an RMD, and the penalty is steep—25% of the amount you should have withdrawn. Get it right, and it’s just part of your normal tax planning.
The Key Ages
Thanks to recent legislation, the RMD starting age has changed:
- If you turned 72 before 2023: Your RMDs have already begun.
- If you turn 72 in 2023 or later: Your RMDs begin at age 73.
- Starting in 2033: The age increases to 75.
The first RMD can be delayed until April 1 of the year following the year you reach the required age. But be careful—if you delay, you’ll have two RMDs in that second year, potentially pushing you into a higher tax bracket.
How It’s Calculated
Your RMD is calculated by dividing your account balance (as of December 31 of the prior year) by a life expectancy factor from IRS tables. As you age, the factor decreases, which means your required withdrawal percentage increases.
For example, at 73, the factor is approximately 26.5, meaning you’d need to withdraw about 3.8% of your balance. By 80, the factor drops to about 20.2, pushing the percentage to roughly 5%.
Strategies to Consider
While you can’t avoid RMDs entirely, there are legitimate strategies to manage their impact:
Roth conversions before RMDs begin. Every dollar converted to a Roth IRA reduces your future RMD base. The years between retirement and your first RMD can be prime conversion years, especially if you’re in a lower tax bracket temporarily.
Qualified Charitable Distributions (QCDs). If you’re 70½ or older and charitably inclined, you can donate up to $105,000 directly from your IRA to qualified charities. The donation counts toward your RMD but isn’t included in your taxable income.
Strategic timing of first RMD. Delaying your first RMD to the following year might make sense if you expect lower income that year—but run the numbers first to avoid a tax bracket surprise.
Account consolidation. Having multiple IRAs complicates RMD calculations. You can aggregate your RMDs and take them from any combination of IRAs, but simplifying your accounts makes tracking easier.
What About Roth Accounts?
Roth IRAs have no RMDs during the owner’s lifetime. This makes them powerful vehicles for tax-free growth and flexible estate planning. However, inherited Roth IRAs (for non-spouse beneficiaries) now generally must be emptied within 10 years—a change from the old “stretch” rules.
Roth 401(k)s previously had RMDs, but starting in 2024, they’re exempt as well. This makes the decision between Roth and traditional contributions more nuanced.
The Bigger Picture
RMDs are just one piece of a comprehensive retirement income strategy. The goal isn’t to minimize taxes in any single year—it’s to minimize taxes over your lifetime while ensuring your money lasts.
Sometimes that means accelerating income in lower-bracket years. Sometimes it means deferring. The right answer depends on your complete financial picture, your other income sources, and your goals for your heirs.
This article is for educational purposes only. Tax laws change frequently, and individual circumstances vary. Consult with qualified tax and financial professionals before making RMD decisions.