Understanding RMDs (Required Distributions)

For decades, you saved money in tax-deferred accounts like 401(k)s and IRAs to prepare for retirement. However, you cannot keep the money in these accounts forever. The IRS requires you to start withdrawing a specific amount annually so they can finally collect the taxes due. These withdrawals are called Required Minimum Distributions (RMDs). Failing to take them results in costly penalties.

The "New" Age Rules: When Do RMDs Start?

The rules regarding when you must start taking distributions have changed significantly due to recent legislation, specifically the SECURE 2.0 Act. It is vital to look at your birth year to determine your specific start date.

Previously, the starting age was 72. However, effective January 1, 2023, the age increased to 73.

  • If you turned 72 in 2022 or earlier: You are already subject to RMDs and must continue taking them.
  • If you were born between 1951 and 1959: Your RMD age is 73.
  • If you were born in 1960 or later: Under current law, your RMD age increases to 75.

If you turn 73 this year, you technically have until April 1 of next year to take your first distribution. However, for all subsequent years, the deadline is December 31.

The Penalty Structure: From 50% to 25%

The snippet you read mentioned a 25% penalty. This is a relatively new development that is actually good news for retirees. Prior to the SECURE 2.0 Act, the penalty for missing an RMD was a massive 50% of the amount not withdrawn.

As of 2023, that penalty has been reduced to 25%.

While 25% is still steep, the IRS offers a further reduction. If you correct the mistake during a “correction window” (generally two years) and submit a corrected tax return, the penalty may be lowered to 10%.

Example: If your calculated RMD was $10,000 and you failed to withdraw it:

  • Old Rule: You owed the IRS $5,000 (50%).
  • New Rule: You owe the IRS $2,500 (25%).
  • With Correction: You might only owe $1,000 (10%).

To request a waiver or report the missed distribution, you typically must file IRS Form 5329.

How Your RMD Is Calculated

You generally do not need to guess the amount. Your RMD is calculated by dividing your tax-deferred account balance as of December 31 of the prior year by a life expectancy factor found in the IRS Uniform Lifetime Table.

For most retirees, the calculation looks like this:

  1. Account Balance: Locate the total value of your IRA or 401(k) on December 31 of last year.
  2. Life Expectancy Factor: Look up your age on the IRS Uniform Lifetime Table. As you get older, this factor gets smaller, which forces the withdrawal percentage to go up.
  3. The Math: Balance Ă· Factor = Your RMD.

Real-World Scenario: Imagine you are 75 years old. According to the current IRS tables, your distribution period factor is 24.6. You have $500,000 in your Traditional IRA.

  • $500,000 Ă· 24.6 = $20,325.20.
  • You must withdraw at least $20,325.20 by December 31 to satisfy the requirement.

Account Types and Aggregation Rules

Not all accounts are treated equally when it comes to RMDs. It is critical to understand which accounts allow you to combine the totals and which ones require individual withdrawals.

Traditional IRAs

If you have multiple Traditional IRAs, you can add up the balances of all of them to calculate your total RMD. You can then withdraw that total amount from just one IRA or split it across several. This is known as “aggregating” your RMDs.

401(k) and 403(b) Plans

These plans generally cannot be aggregated. If you have three different old 401(k)s from previous employers, you must calculate the RMD for each specific account and withdraw the money from each specific account. This is a common tripping point for retirees that leads to penalties.

Roth 401(k)s

A major change took effect in 2024. Roth 401(k) accounts no longer require RMDs during the owner’s lifetime. Previously, you had to take RMDs from Roth 401(k)s even though the withdrawals were tax-free. Now, they are treated similarly to Roth IRAs, which have never had lifetime RMD requirements.

The "Still Working" Exception

There is one notable exception to the mandatory distribution rules. If you are currently employed and over age 73, you may be able to delay taking RMDs from your current employer’s 401(k) plan.

To qualify for this delay:

  1. You must still be working for the company that sponsors the plan.
  2. You generally cannot own more than 5% of the company.
  3. The specific plan rules must allow for this exception.

This exception does not apply to IRAs or 401(k)s from previous employers. You must still take RMDs from those older accounts.

Reducing the Tax Hit: Qualified Charitable Distributions (QCDs)

Because RMDs count as taxable income, they can push you into a higher tax bracket or increase your Medicare premiums (known as IRMAA surcharges). One of the most effective ways to satisfy your RMD without increasing your taxable income is using a Qualified Charitable Distribution (QCD).

A QCD allows you to transfer money directly from your IRA to a qualified charity.

  • The Benefit: The distribution counts toward your RMD, but it is excluded from your taxable income.
  • The Limit: For 2024, the annual limit is $105,000 per individual.
  • The Rule: The funds must go directly from the custodian to the charity. If you withdraw the money to your checking account and then write a check to the charity, it does not count as a QCD.

Frequently Asked Questions

Can I withdraw more than the RMD amount? Yes. The RMD is the minimum required amount. You can always withdraw more if you need the funds for living expenses. However, any excess withdrawn in one year cannot be applied to future years’ RMDs.

What happens if I wait until April 1 to take my first RMD? If you use the one-time delay for your very first RMD, you will have to take two distributions in that same tax year (the delayed one by April 1, and the current year’s by December 31). This “bunching” of income could push you into a significantly higher tax bracket.

Do I have to spend the RMD money? No. You are only required to take the money out of the tax-advantaged account to pay taxes on it. Once the money is withdrawn (and taxes are paid), you can reinvest it in a taxable brokerage account, put it in a savings account, or spend it as you please.

Are inherited accounts subject to RMDs? Yes, but the rules are complex. Under the 10-year rule established by the SECURE Act, most non-spouse beneficiaries must empty the inherited account within 10 years. Annual RMDs may be required during years 1 through 9 if the original account owner had already started taking their RMDs before they passed away.