Required Minimum Distributions

Required Minimum Distributions (RMDs): The Forced Withdrawal

Every dollar in a traditional IRA, 401(k), 403(b), or similar pre-tax retirement account represents a deferred tax liability—money the IRS has allowed to grow without taxation, on the understanding that it will eventually be taxed upon withdrawal. Required Minimum Distributions are the mechanism the IRS uses to ensure that deferral eventually ends. Starting at age 73 under current law, account holders must withdraw a minimum amount each year from pre-tax accounts, whether they need the money or not.

For diligent savers who have accumulated substantial pre-tax balances, RMDs represent the defining tax challenge of the retirement decumulation phase—one that shapes account withdrawal strategy for decades before it arrives, not just in the year it begins.

THE MECHANICS: HOW RMDs ARE CALCULATED

The annual RMD for each account is calculated by dividing the account's December 31 balance from the prior year by a life expectancy factor from the IRS Uniform Lifetime Table (Publication 590-B).

The Uniform Lifetime Table provides a factor for each age. Selected values:

Age 73: 26.5 Age 75: 24.6 Age 80: 20.2 Age 85: 16.0 Age 90: 12.2 Age 95: 8.9

Example: A 75-year-old with a $1,200,000 traditional IRA balance on December 31 of the prior year:

RMD = $1,200,000 ÷ 24.6 = $48,780

This $48,780 must be withdrawn from the account during the current year. It is fully taxable as ordinary income in the year received—added to Social Security, pension income, and any other income sources to determine total taxable income for that year.

The calculation is repeated annually. As the life expectancy factor decreases with age and the account balance changes with investment returns and prior withdrawals, the RMD amount fluctuates.

THE AGE 73 RULE AND ITS HISTORY

The SECURE Act of 2019 raised the RMD beginning age from 70½ to 72. SECURE 2.0, enacted in December 2022, raised it again to 73, effective January 1, 2023—and further to age 75 beginning in 2033.

Individuals who turned 72 before January 1, 2023 continue under the prior rules. Those who turn 73 in 2023 or later use the new 73-year threshold.

The first RMD can be delayed until April 1 of the year following the year you turn 73—a one-time extension available only for the first RMD. Taking advantage of this extension means taking two RMDs in the second year (the prior year's delayed RMD plus the current year's), which can push taxable income significantly higher. For most retirees, taking the first RMD in the year they turn 73 rather than delaying is preferable to a double-RMD year.

WHICH ACCOUNTS ARE SUBJECT TO RMDs

Required Minimum Distributions apply to: - Traditional IRAs - SEP IRAs - SIMPLE IRAs - 401(k), 403(b), and 457(b) plans (employer-sponsored)

- Most inherited IRAs and retirement accounts (discussed below)

Accounts not subject to RMDs during the owner's lifetime: - Roth IRAs (the owner never faces RMDs; only inherited Roth IRAs trigger them) - Roth 401(k)s (as of 2024 under SECURE 2.0, RMDs on Roth 401(k)s have been eliminated for the original account owner)

Multiple IRA accounts: If you have multiple traditional IRAs, the RMD is calculated separately for each account, but the total required distribution can be taken from any one or combination of the accounts. You don't have to withdraw from every IRA proportionally.

Multiple 401(k) accounts: If you have multiple 401(k) accounts at different employers, each must satisfy its RMD separately. You cannot aggregate 401(k) RMDs the way you can aggregate IRA RMDs.

THE TAX IMPACT: WHY LARGE PRE-TAX BALANCES CREATE PROBLEMS

The RMD problem is most acute for retirees who have accumulated large pre-tax balances while living relatively modestly during retirement. They may not need the RMD income—but they must take it, pay tax on it, and find something to do with it.

The consequences compound:

Higher marginal tax rates: A retiree with $80,000 in annual Social Security and pension income who receives a $60,000 RMD has $140,000 in taxable income—potentially reaching the 22% or 24% bracket on the combined amount.

Medicare IRMAA surcharges: Medicare Part B and Part D premiums are income-related for higher earners. In 2024, individuals with MAGI above $103,000 ($206,000 for married filing jointly) pay IRMAA surcharges ranging from $70 to $419 per month per person above the standard premium. A large RMD can push MAGI above an IRMAA threshold, adding $840 to $5,028 per year in Medicare costs. These surcharges are calculated on prior-year MAGI, meaning a large RMD in one year affects Medicare costs two years later.

Social Security taxation: Up to 85% of Social Security benefits become taxable once combined income (MAGI plus half of Social Security benefits) exceeds $44,000 for married filers. For many retirees, RMDs push them firmly into the 85% taxation range, effectively taxing Social Security benefits that would have been partially or fully excluded at lower income levels.

The interaction of these three effects—marginal rate, IRMAA, and Social Security taxation—creates a compounding tax marginal rate on RMD income that frequently exceeds 40% for affected retirees, even in the 22% federal bracket.

ROTH CONVERSION STRATEGY TO MANAGE FUTURE RMDs

The most effective tool for managing RMD burden is Roth conversions executed before RMDs begin—ideally in the years between retirement and age 73, when income may be relatively low before Social Security and RMDs combine.

Each dollar converted from traditional IRA to Roth IRA is taxed at conversion, reducing the pre-tax balance that will eventually generate RMDs. The converted assets grow tax-free in the Roth and are never subject to RMDs. The beneficiaries who inherit the Roth IRA also receive tax-free growth (though they face a 10-year distribution window under the SECURE Act's inherited IRA rules).

The conversion strategy calculates the optimal amount to convert each year to fill available tax bracket capacity—typically converting up to the top of the 12% or 22% bracket without triggering IRMAA surcharges or other threshold effects.

Example: A retiree aged 66 with $1,500,000 in a traditional IRA, $30,000 per year in Social Security, and no other income. The 22% federal bracket for married filing jointly extends to $94,300 in taxable income in 2024 (after the $29,200 standard deduction: $123,500 in adjusted gross income). Converting approximately $93,500 per year from traditional IRA to Roth keeps the retiree in the 22% bracket while significantly reducing the balance that will generate RMDs starting at 73.

Over seven years of conversion (ages 66 to 72), at $93,500 per year: $654,500 converted, leaving approximately $845,500 in the traditional IRA (after growth, net of conversions). The RMD on $845,500 at age 73 using a 26.5 factor: $31,906—substantially more manageable than the RMD on the unconverted $1,500,000+ portfolio.

THE QUALIFIED CHARITABLE DISTRIBUTION: THE MOST TAX-EFFICIENT RMD USE

For retirees aged 70½ or older with charitable intent, the Qualified Charitable Distribution (QCD) is the most tax-efficient mechanism for satisfying an RMD. Under a QCD, up to $105,000 per year (2024, indexed for inflation) can be transferred directly from an IRA to a qualifying charity. The distribution is excluded from gross income entirely—it counts toward the RMD requirement without adding to taxable income.

A retiree with a $48,000 RMD who directs $25,000 to charity via QCD reduces their taxable income for the year by $25,000 compared to taking the full RMD in cash and donating separately. The QCD is preferable to taking the RMD as cash and then deducting the charitable donation, because the QCD reduces AGI—which affects IRMAA calculations, Social Security taxation, and ACA subsidy eligibility—while a charitable deduction only affects taxable income for itemizers.

The QCD must go directly from the IRA custodian to the charity—the account holder cannot receive the funds and then donate them. Most IRA custodians accommodate QCDs through a check made payable to the charity or a direct electronic transfer.

FAILING TO TAKE RMDs: THE PENALTY

The penalty for failing to take a required minimum distribution (or taking less than the required amount) is 25% of the shortfall—reduced to 10% if the missed RMD is corrected within two years. This is one of the steeper penalties in the tax code, and it applies to the amount not withdrawn, not to the account balance.

A retiree who should have taken a $50,000 RMD but withdrew only $20,000 owes a penalty of 25% × $30,000 shortfall = $7,500 (or $3,000 if corrected promptly within the correction window).

Most IRA custodians send RMD notices and can be set up to automatically distribute the required amount—eliminating the risk of accidental non-compliance. Given the penalty stakes, automating the RMD through your custodian is worth the 15 minutes it requires.