How Required Minimum Distributions Work

How Do Required Minimum Distributions Work?

For many retirees, the biggest surprise in retirement isn’t market volatility or healthcare costs, it’s taxes. One of the most important tax rules to understand is the Required Minimum Distributions (RMDs). If you’ve saved in tax-deferred accounts like IRAs or 401(k)s, the IRS requires you to withdraw a certain amount each year once you reach a certain age. Here is what you need to know about how Required Minimum Distributions work:

When Do Required Minimum Distributions (RMDs) Start?

As of 2025, RMDs begin at age 73. That means in the year you turn 73, you must take your first required withdrawal from your retirement accounts. However, you can choose to delay your very first RMD until April 1 of the following year. While this gives you more time, it can also create a problem: you’ll have to take two RMDs in that same year, one for the prior year and one for the current year. For many retirees, doubling up can mean a much higher tax bill and possibly pushing into a higher tax bracket. Careful planning is essential to decide whether delaying makes sense.

There is another important rule change. Starting in 2033, RMDs will increase again to age 75 for anyone born in 1960 or later. That gives younger retirees even more time to plan withdrawals and use tax strategies before RMDs begin.

What Accounts do Required Minimum Distributions (RMDs) Apply to?

RMDs apply to most tax-deferred accounts, including:

• Traditional IRAs

• SEP and SIMPLE IRAs

• 401(k) and 403(b) plans

• Other employer-sponsored retirement accounts

Roth IRAs, on the other hand, do not require RMDs during your lifetime.

How Is the Required Minimum Distribution (RMD) Amount Calculated?

The IRS uses a formula based on your account balance and your life expectancy.

• Account balance: The total value of your retirement account as of December 31 of the previous year.

• Life expectancy factor: Published in IRS tables based on your age.

For example, if you turn 73 in 2025 and have $500,000 in your IRA, the life expectancy factor might be 26.5. Your RMD would be about $18,868 ($500,000 ÷ 26.5). Each year, the percentage you must withdraw increases as you get older.

Why Required Minimum Distributions (RMDs) Matter

RMDs are taxable. The money you withdraw is added to your taxable income for the year, which can:

• Push you into a higher tax bracket

• Increase how much of your Social Security is taxed

• Raise your Medicare premiums (IRMAA)

That’s why planning ahead is so important.

Strategies to Help Lower Future RMDs

1. Take Withdrawals Before RMD Age

   You don’t have to wait until 73 (or 75 for younger retirees) to take money out of your IRA. By spreading withdrawals over more years, you reduce the size of your account and lower your future RMDs.

   
   

2. Roth Conversions

   Converting part of your IRA to a Roth IRA before RMD age allows you to pay taxes now at current rates and move money into a Roth account that has no RMDs in retirement. This can lower future taxable income and create a tax-free source of withdrawals.

   
   

3. Qualified Charitable Distributions (QCDs)

   If you’re charitably inclined, a QCD lets you donate directly from your IRA to a qualified charity (up to $108,000 per year for 2025). The distribution counts toward your RMD but is excluded from taxable income. This strategy is a powerful way to give while lowering your tax bill.

   
   

4. Coordinate Across Accounts

   With multiple retirement accounts, you can sometimes manage RMDs more efficiently by deciding which accounts to draw from first. For example, you may want to tap IRAs for RMDs while letting Roth accounts grow tax-free.

Final Thoughts

RMDs are an unavoidable part of retirement, but they don’t have to be a financial burden. By planning, you can manage withdrawals, reduce taxes, and even use them to fund charitable goals. With the new rules delaying RMDs to 73 (and later 75 for younger retirees), there is more time to take advantage of strategies like Roth conversions and charitable giving.

If you’re approaching RMD age, now is the time to build a plan that minimizes the tax impact.

If you’re unsure how required minimum distributions might affect your taxes, I invite you to reach out. Helping clients navigate these decisions is part of what we do every day.

- Steve Balch, CFP®

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Frequently Asked Questions About RMDs

At what age do RMDs start? RMDs currently begin at age 73. Starting in 2033, the age requirement will increase to 75 for anyone born in 1960 or later.

Can I delay my first RMD? Yes. You can delay your first RMD until April 1 of the year after you turn 73. But delaying means you’ll have to take two RMDs in that same year, which could result in a much larger tax bill.

Do Roth IRAs have RMDs? No. Roth IRAs are not subject to RMDs during the owner’s lifetime, making them a powerful planning tool.

What happens if I miss an RMD? Missing an RMD triggers a steep penalty, which is currently 25% of the amount you were required to withdraw (which may be reduced to 10% if corrected quickly).

Can I take more than the RMD? Yes. You can always withdraw more than the required amount. Just remember that all withdrawals are added to your taxable income.

Do RMDs apply to 401(k)s if I’m still working? If you’re still working past age 73, you may be able to delay RMDs from your current employer’s 401(k). However, this doesn’t apply to IRAs or old 401(k)s from previous jobs.

How can I lower my RMDs? There are several ways to reduce your future RMDs and the taxes that come with them:

• Take withdrawals earlier to reduce account balances before RMD age.

• Complete Roth conversions to move funds into tax-free accounts.

• Use Qualified Charitable Distributions (QCDs) to give directly to charity and satisfy your RMD without adding to taxable income.

A well-designed tax and income plan can help you manage RMDs efficiently and keep more of your retirement income working for you.