Required Minimum Distribution (RMD)

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Required Minimum Distribution (RMD): What It Is and How It Works

What is an RMD?

A required minimum distribution (RMD) is the minimum amount you must withdraw each year from certain tax-deferred retirement accounts to avoid an IRS penalty. RMDs apply to accounts such as traditional IRAs, SEP IRAs, SIMPLE IRAs, and most employer-sponsored plans (e.g., 401(k)s). Roth IRAs are exempt from RMDs during the original owner’s lifetime; Roth 401(k)s are subject to RMD rules unless rolled into a Roth IRA.

When do RMDs start?

  • Current starting age: 73.
  • Prior milestones: the RMD age was 72 before 2023 and 70½ before 2020.
  • First RMD deadline: April 1 of the year after you reach the starting age. If you wait until April 1 for the first RMD, you must still take that year’s RMD by Dec. 31 as well (resulting in two RMDs in one tax year).

How RMDs are calculated

  1. Determine the account balance as of Dec. 31 of the prior year (fair market value).
  2. Find the applicable life-expectancy (distribution) factor from the IRS tables that matches your age. Different tables apply to special situations (for example, when a spouse is the sole beneficiary and is more than 10 years younger).
  3. Divide the prior-year year-end balance by the distribution factor. The result is the RMD for that account.

Example

If your IRA was worth $205,000 on Dec. 31 of the prior year and your distribution factor is 25.5, your RMD = $205,000 ÷ 25.5 = $8,039.22. That is the minimum you must withdraw that year to avoid penalty.

Aggregation and multiple accounts

  • IRAs: Calculate the RMD for each IRA separately but you may withdraw the combined total from one or multiple IRAs.
  • Employer plans (401(k), 403(b), etc.): RMDs generally must be calculated and taken separately from each plan. You can avoid multiple RMDs by rolling accounts into an IRA before RMDs begin (subject to plan rules).

Taxation and other rules

  • RMDs are taxable as ordinary income because contributions were generally made pre-tax (except for nondeductible bases).
  • You may withdraw more than the RMD if desired, but doing so could increase your tax bill for the year.
  • You generally cannot use the RMD amount to satisfy a Roth conversion — the RMD must be withdrawn first. Converting pre-RMD funds to a Roth prior to the RMD age can reduce future RMDs but will trigger taxable income on the conversion.

Special situations

  • Still working: If you’re still employed at the company sponsoring the plan and do not own more than 5% of the company, you may be able to delay RMDs from that employer’s qualified plan until you retire. This rule does not apply to IRAs.
  • Inherited accounts: RMD rules for inherited IRAs differ significantly depending on when the account owner died and your beneficiary status. The 2019 SECURE Act and later guidance replaced many “stretch IRA” strategies with time-limited withdrawal rules (for many beneficiaries this is a 10‑year requirement). Surviving spouses, minors, disabled beneficiaries, and others may have different options. Consult IRS guidance or a tax advisor for inherited-account specifics.

Penalties for not taking RMDs

If you fail to take the full RMD, the amount not withdrawn is subject to a penalty. The penalty was reduced under recent legislation:
– Penalty amount: generally 25% of the RMD not taken.
– If the shortfall is corrected within a specified period (IRS guidance applies), the penalty may be reduced (historically reduced to 10% in certain correction situations). If you miss an RMD, contact the plan custodian and a tax professional promptly to determine correction steps.

Practical steps and tips

  • Ask your account custodian to compute your RMD; many custodians provide automatic RMD distributions.
  • If you don’t need RMD funds for living expenses, plan for tax-efficient uses (tax planning, charitable distributions if eligible, or timing distributions across years). Qualified charitable distributions (QCDs) from an IRA may satisfy up to $100,000 of an RMD for eligible taxpayers.
  • Review IRS Publication 590-B and your plan documents for current rules and tables. Laws and limits change, so consider consulting a tax advisor for complex situations (inherited IRAs, large balances, conversions).

Key takeaways

  • RMDs require annual withdrawals from most tax-deferred retirement accounts starting at age 73.
  • The RMD equals the prior year‑end account balance divided by an IRS life‑expectancy factor.
  • Roth IRAs are not subject to RMDs during the owner’s lifetime; Roth 401(k)s are unless rolled to a Roth IRA.
  • Missing an RMD can trigger a significant penalty; timely correction and professional advice can mitigate consequences.