Required Minimum Distributions Explained: Ages, Math and Deadlines

Traditional 401(k)s and IRAs come with a bargain: a tax break on the way in, and tax-deferred growth for decades. The government collects eventually. Required minimum distributions (RMDs) are the rule that makes it happen, forcing account owners to withdraw at least a set amount each year once they reach a certain age. Missing one is costly, and the rules have changed several times in recent years.

Which accounts have RMDs

RMDs apply to tax-deferred retirement savings, including:

• Traditional IRAs, plus SEP and SIMPLE IRAs.
• Employer plans such as 401(k), 403(b) and governmental 457(b) plans, along with profit-sharing plans.

They do not apply, for the original owner, to:

• Roth IRAs.
• Designated Roth accounts in workplace plans (Roth 401(k)s and Roth 403(b)s), beginning with 2024.

When they start

The SECURE Act of 2019 and SECURE 2.0 Act of 2022 raised the starting age twice. Under current law:

First-year timing. Your first RMD is due by April 1 of the year after you reach the RMD age. Every later RMD is due by December 31. Delaying the first one into the following spring means taking two RMDs in one calendar year, which can push you into a higher tax bracket.

Still-working exception. If you are still employed and do not own 5% or more of the company, you can generally delay RMDs from that employer's plan until you retire, if the plan allows. This exception does not apply to IRAs.

How the amount is calculated

The formula is simple:

RMD = account balance on December 31 of the prior year ÷ distribution period

The distribution period comes from IRS life expectancy tables in Publication 590-B. Most owners use the Uniform Lifetime Table. If your sole beneficiary is a spouse more than 10 years younger, you use the Joint Life and Last Survivor Expectancy Table, which produces a smaller required amount.

An illustration: a 73-year-old using the Uniform Lifetime Table, where the distribution period at 73 is 26.5, with an IRA worth $500,000 at the end of the prior year, would need to withdraw about $18,868 ($500,000 ÷ 26.5). The distribution period shrinks each year, so the percentage that must come out rises with age. Always confirm the factor in the current version of Publication 590-B.

Most custodians calculate the RMD for you and show it on your account, but the responsibility for taking the correct amount rests with you.

Multiple accounts: what can be combined

• Traditional IRAs: calculate each one separately, then take the total from any one or a combination.
• 403(b) accounts: may be combined with each other in the same way.
• 401(k) and 457(b) plans: each plan's RMD must come from that plan.
• IRA RMDs cannot be satisfied with withdrawals from a 401(k), or vice versa.

Taxes and withholding

RMDs from pre-tax accounts are taxed as ordinary income in the year withdrawn (any after-tax basis comes out tax-free). Custodians can withhold federal (and sometimes state) income tax from the distribution. Many retirees take their RMD late in the year and have tax withheld from it, which can cover tax on other income too, since withholding is treated as paid evenly over the year.

RMDs cannot be rolled over into another retirement account. You can, however, reinvest the cash in a taxable brokerage account if you do not need to spend it.

The penalty for missing one

If you take less than required, the shortfall is subject to an excise tax of 25% under SECURE 2.0, down from 50% under the old rules. If you correct the mistake promptly within the correction window, the tax drops to 10%. You report it on IRS Form 5329, where you can also request a waiver if the shortfall was due to reasonable error and you are taking steps to fix it.

Qualified charitable distributions

IRA owners aged 70½ or older can send money directly from an IRA to an eligible charity as a qualified charitable distribution (QCD). A QCD counts toward your RMD and is excluded from taxable income, which can be more valuable than an itemized deduction, especially for those who take the standard deduction. The annual QCD limit is now indexed for inflation; check the IRS website for the current figure. QCDs are not available from active 401(k) plans.

Inherited accounts

Inherited retirement accounts follow separate rules:

• Surviving spouses have the most flexibility, including treating the account as their own.
• Eligible designated beneficiaries (including minor children of the owner, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the owner) can generally stretch withdrawals over their own life expectancy, with some limits.
• Most other individual beneficiaries must empty the account by the end of the 10th year after the owner's death. If the original owner had already begun RMDs, final IRS regulations generally also require annual distributions during those years.

Inherited account rules are among the most complex in the tax code, and recent regulations changed them, so beneficiaries often benefit from professional guidance.

Taking RMDs in kind and timing within the year

An RMD does not have to be taken in cash. You can transfer shares from the IRA to a taxable brokerage account in kind; the value on the transfer date counts toward the RMD and is taxed as income, and the shares then start a new cost basis. This avoids selling investments you want to keep.

Timing is flexible as long as the full amount comes out by the deadline. Some retirees take a monthly distribution to replicate a paycheck; others take one lump sum in December, which keeps money invested longer but risks a last-minute scramble or a market decline right before the withdrawal. Custodians can usually automate either approach, along with tax withholding, so the requirement is met without relying on memory.

Planning around RMDs

A few strategies are widely discussed for managing future RMDs, each with trade-offs:

• Roth conversions in lower-income years before RMDs begin, which reduce future required withdrawals but trigger tax now.
• Withdrawing earlier from pre-tax accounts to smooth taxable income across retirement.
• QCDs for those already giving to charity.
• Coordinating with Social Security and Medicare premiums, since higher income can raise the latter.

A yearly checklist helps: confirm your RMD amount in January, decide on timing and withholding, take the distribution well before December 31, and keep beneficiary designations current. The calendar is predictable; the expensive mistakes come from forgetting it.

This article is for general education and is not tax or legal advice. Confirm current rules with the IRS or a qualified tax professional.