Understanding the rules that govern mandatory withdrawals from retirement accounts
Introduction
Tax advantaged retirement accounts offer significant benefits during the accumulation phase, allowing investments to grow on a tax deferred or tax free basis for decades. However, the IRS does not permit indefinite deferral. At a certain point, account owners must begin withdrawing funds and paying taxes on the distributions. These mandatory withdrawals are known as required minimum distributions, or RMDs.
Understanding RMD rules is essential for effective retirement income planning. Failure to take the correct distribution by the applicable deadline can result in substantial penalties. For families with significant retirement account balances, RMDs also have implications for income tax planning, Medicare premiums, and estate planning strategies.
Which Accounts Are Subject to RMDs?
RMD rules apply to most tax deferred retirement accounts. These include traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer sponsored plans such as 401(k), 403(b), and 457(b) accounts. Inherited retirement accounts, whether inherited IRAs or inherited employer plans, are also subject to distribution requirements, though the rules differ based on the relationship between the original owner and the beneficiary.
Roth IRAs represent an important exception during the original owner’s lifetime. Unlike traditional IRAs, Roth IRAs do not require distributions while the account owner is alive. This feature can make Roth accounts particularly valuable for families who do not need the funds for living expenses and wish to maximize tax free growth. However, inherited Roth IRAs are subject to distribution requirements for most beneficiaries under current law.
Roth 401(k) accounts were previously subject to RMDs, but legislation effective in 2024 eliminated this requirement, aligning the treatment of Roth 401(k) accounts with Roth IRAs during the owner’s lifetime.
When Do RMDs Begin?
The age at which RMDs must commence has changed several times in recent years. Under current law, individuals must begin taking RMDs by April 1 of the year following the year in which they reach age 73. This starting point is known as the required beginning date.
For those who reached age 72 before 2023, the prior rules continue to apply, meaning their RMDs have already begun. Individuals born in 1960 or later will see their required beginning date shift to age 75 starting in 2033, providing additional years of tax deferred growth.
The April 1 deadline applies only to the first RMD. All subsequent RMDs must be taken by December 31 of each year. This creates a potential bunching issue for individuals in their first RMD year. If they delay their initial distribution until the following April, they must take two RMDs in the same calendar year, which may push them into a higher tax bracket or trigger other income related consequences.
For employer sponsored plans, individuals who are still working and do not own more than five percent of the company may delay RMDs from that specific plan until they retire. This exception does not apply to IRAs or to plans from former employers.
How Are RMDs Calculated?
The RMD for a given year is calculated by dividing the account balance as of December 31 of the prior year by a life expectancy factor from IRS tables. The IRS publishes three tables for this purpose. The Uniform Lifetime Table applies to most account owners. The Joint and Last Survivor Table applies when the sole beneficiary is a spouse who is more than ten years younger than the account owner. The Single Life Expectancy Table applies to beneficiaries of inherited accounts.
Each year, the account owner looks up their age on the applicable table to find the distribution period, then divides the prior year end balance by that factor. As the account owner ages, the distribution period decreases, resulting in progressively larger required distributions as a percentage of the account balance.
For individuals with multiple traditional IRAs, the RMD is calculated separately for each account, but the total amount may be withdrawn from any one or combination of IRAs. This flexibility allows for strategic distribution planning. However, RMDs from employer plans must generally be taken separately from each plan and cannot be aggregated with IRA distributions.
The IRS updated its life expectancy tables effective in 2022, reflecting longer life expectancies and resulting in slightly smaller required distributions for most account owners compared to the prior tables.
Penalties for Missed or Insufficient RMDs
The penalty for failing to take the full RMD by the applicable deadline was historically quite severe, set at 50 percent of the shortfall. Legislation enacted in 2022 reduced this penalty to 25 percent of the amount that should have been distributed but was not. The penalty drops further to 10 percent if the shortfall is corrected within a specified correction window.
To avoid penalties, account owners should establish systems to ensure timely distributions. Many custodians offer automatic RMD services that calculate and distribute the required amount each year. For those who prefer more control, calendar reminders and regular communication with advisors can help prevent missed deadlines.
If an RMD is missed, account owners should take the distribution as soon as the error is discovered and consider filing IRS Form 5329 with an explanation requesting a waiver of the penalty. The IRS has discretion to waive penalties when the shortfall was due to reasonable error and steps are being taken to remedy the situation.
RMDs and Inherited Retirement Accounts
The rules governing distributions from inherited retirement accounts changed substantially with the SECURE Act of 2019 and subsequent legislation. The applicable rules depend on the relationship between the beneficiary and the original account owner, as well as when the original owner passed away.
Surviving spouses have the most flexibility. They may roll the inherited account into their own IRA, treating it as their own and delaying RMDs until their own required beginning date. Alternatively, they may keep the account as an inherited IRA and take distributions based on their own life expectancy.
Most non-spouse beneficiaries who inherited accounts after 2019 are subject to the ten year rule, which requires complete distribution of the account within ten years of the original owner’s death. If the original owner had already begun taking RMDs, annual distributions may also be required during the ten year period. If the original owner died before their required beginning date, the beneficiary may have more flexibility in timing distributions within the ten year window.
Certain categories of beneficiaries qualify as eligible designated beneficiaries and may still use the stretch IRA approach, taking distributions over their own life expectancy. These include minor children of the account owner (until they reach the age of majority), disabled or chronically ill individuals, and beneficiaries who are not more than ten years younger than the deceased account owner.
The rules for inherited accounts are among the most complex in the retirement planning landscape, and the IRS has issued guidance clarifying various aspects of the SECURE Act provisions. Beneficiaries should work with qualified advisors to understand their specific obligations and planning opportunities.
Strategic Considerations for RMD Planning
While RMDs are mandatory, their timing and character can be managed with thoughtful planning. Several strategies merit consideration depending on individual circumstances.
Qualified charitable distributions allow individuals age 70½ or older to transfer up to a specified amount annually (currently $111,000, indexed for inflation) directly from an IRA to a qualified charity. The distribution satisfies the RMD requirement but is excluded from taxable income, effectively providing a deduction even for those who do not itemize. For charitably inclined families, QCDs can be an efficient way to support philanthropic goals while managing tax liability.
Roth conversions in the years before RMDs begin can reduce future required distributions by shifting assets from traditional to Roth accounts. While conversions generate current taxable income, they remove assets from accounts subject to RMDs and create a pool of funds that can grow tax free. The analysis of whether and how much to convert depends on current and projected future tax rates, time horizon, and estate planning objectives.
For those who do not need RMD funds for living expenses, reinvesting the after tax proceeds in a taxable brokerage account maintains investment exposure while building a pool of assets with potentially favorable capital gains treatment. Alternatively, using RMD funds to pay life insurance premiums within an irrevocable trust can leverage required distributions into estate planning benefits.
Timing distributions within the calendar year can also matter. Taking RMDs early in the year allows the funds to be reinvested sooner outside the retirement account. Conversely, delaying until later in the year keeps assets in the tax advantaged account longer. The optimal approach depends on market conditions, income timing, and individual preferences.
RMDs and Other Income Related Provisions
RMDs count as ordinary income for federal tax purposes and can affect other aspects of a family’s financial picture. Medicare Part B and Part D premiums are based on modified adjusted gross income from two years prior, meaning large RMDs can trigger income related monthly adjustment amounts, commonly known as IRMAA surcharges.
RMD income can also affect the taxation of Social Security benefits, the net investment income tax threshold, and eligibility for various deductions and credits that phase out at higher income levels. For families managing these interconnected provisions, projecting the ripple effects of RMDs is an important component of annual tax planning.
State income tax treatment of retirement distributions varies. Some states exempt retirement income entirely or provide partial exclusions, while others tax distributions at ordinary rates. Families considering relocation in retirement should factor state tax treatment of RMDs into their analysis.
Conclusion
Required minimum distributions represent the point at which the government recaptures the tax benefits provided during the accumulation phase of retirement savings. Understanding when RMDs begin, how they are calculated, and what penalties apply for noncompliance forms the foundation for effective retirement income planning.
Beyond compliance, RMDs present planning opportunities. Qualified charitable distributions, strategic Roth conversions, and thoughtful coordination with other income sources can help families manage their tax liability while meeting distribution requirements. For those with inherited accounts, navigating the post-SECURE Act landscape requires careful attention to the applicable rules based on beneficiary category and timing.
Working with qualified tax and financial advisors can help confirm that RMD obligations are met and that distributions are integrated into a comprehensive wealth management strategy aligned with each family’s unique circumstances and objectives.