What Are Required Minimum Distributions (RMDs)?

Most people focus on figuring out how to save enough for retirement during their working years. But it’s also important to have a plan for withdrawing and spending the money you put into your retirement accounts, especially because many common types of retirement accounts have required minimum distributions (RMDs). That means you must withdraw at least a certain amount of money each year to avoid penalties.

Without a solid withdrawal strategy, you could end up paying more tax than necessary—or even risk running out of money too soon. To help you navigate this, here are the RMD basics you need to know.

What Is a Required Minimum Distribution?

After going up to age 75, the federal government generally requires you to make annual withdrawals—called required minimum distributions or RMDs—from tax-sheltered retirement accounts, such as an employer-sponsored traditional retirement account or an individual retirement account (IRA).

You may need to take RMDs from several types of accounts, including:

• Traditional IRA
• SEP or SIMPLE IRA
• 401(k), 403(b) or 457 plan
• Profit-sharing plan
• Defined benefit plan

These accounts typically allow tax-deductible contributions, meaning you defer taxes until you withdraw the funds. RMDs ensure that people who get these tax benefits can’t avoid paying income taxes forever.

Roth accounts and RMDs

Roth accounts, such as a Roth IRA or Roth 401(k), don’t have RMDs for the original account owner. With a Roth account, you pay taxes on the money before you contribute it to the retirement account. However, if you inherit a Roth IRA or Roth 401(k), you may be required to take RMDs, depending on your relationship with the original owner.

RMD Age Requirements and Deadlines

According to the Secure Act 2.0 of 2022:

• You must start taking RMDs by April 1 of the year after you turn 73. For example, if you turn 73 in 2027, your first RMD (for 2027) is due by April 1, 2028.
• In 2033, the starting age will increase to 74. That means you’ll have to take the first RMD by April 1 of the year you turn 75.

After the first RMD, all subsequent RMDs must be taken by December 31 each year. But there’s an exception for employer-sponsored plans. If you have an employer-sponsored plan, such as a 401(k), and you don’t own 5% or more of the business, you can delay your RMDs from that account until you retire. However, this exception does not apply to IRAs—RMDs from IRAs must begin at the required age, regardless of employment status.

READ MORE: Retirement Savings Goals at Every Age

How To Calculate Your RMD

Your RMD is calculated by:

1. Taking your account balance at the end of the previous year.
2. Dividing it by the IRS distribution period based on your age.

There are different IRS distribution period tables depending on the circumstances. Use the Uniform Lifetime Table if you’re calculating your own RMDs, unless your spouse is more than 10 years younger than you and is the sole beneficiary of the IRA. You can also use this RMD calculator to calculate your RMDs.

Example RMD calculation

If you’re 75 years old, your distribution period will be 24.6. If you have $200,000 in a 401(k) at the end of the previous year, your RMD will be 200,000 ÷ 24.6 = $8,130. You must withdraw at least that amount by the deadline to avoid penalties.

RMDs for multiple accounts

You may have different RMDs if you have more than one retirement account. You can also withdraw more than the RMD—the RMD is just the minimum you must withdraw.

Consequences of Failing To Take RMDs

The Secure Act 2.0 reduced the penalty for missing an RMD. Previously, you had to pay 50% of the amount you failed to withdraw, plus income taxes on the required withdrawal. Now, if you don’t take an RMD on time, you may have to pay a 25% excise tax on the amount you should have withdrawn, plus income taxes. If you miss an RMD from an IRA, you can also reduce the penalty to 10% if you correct the mistake within two years.

You can also file an appeal if you miss an RMD. To do this, take the RMD first and then submit Form 5329 to the IRS along with a written explanation of the circumstances. However, since the approval isn’t guaranteed, you may want to consult with a tax professional familiar with the appeal process.

Strategies for Managing RMDs

You can take your RMDs as a lump-sum withdrawal or through a series of withdrawals throughout the year. Either way, you’ll want to have a plan for using the money. Here are some options:

• Spend it: Use the money for daily expenses—or a large specific expense like travel or a big purchase—during retirement.
• Save it: Deposit your RMDs in a high yield savings account and earn interest until you need to use the money.
• Invest it: If you don’t need the money right away, you could invest the money in a taxable brokerage account. However, be mindful of the market risks, any tax implications and whether you may need to tap into the money soon.
• Donate it: If you’re taking RMDs from an IRA and you’re at least 70½ years old, you can make qualified charitable distributions (QCDs) and transfer money directly to a qualified charity without counting it as taxable income. There are annual limits, but QCDs could help you satisfy your RMDs and benefit the charity more than if you sold investments, withdrew cash and then donated it.

Tax considerations

Unless you’re donating the money via a QCD, be prepared to pay income taxes on your RMD withdrawals—which could push you into a higher tax bracket. The extra income could affect Social Security taxation and your Medicare premiums.

Reducing RMDs through early withdrawals or Roth conversions

Some people start withdrawing money from retirement accounts after age 59½ (when early withdrawal penalties no longer apply). Taking withdrawals early and spreading out the distributions over multiple years can help reduce RMD amounts later, potentially keeping you in a lower tax bracket.

Another strategy is a Roth conversion, whereby you roll over money from a traditional retirement account to a Roth account and pay income taxes on the converted amount. You can then let the investments grow tax-free without RMDs, and you won’t have to pay income taxes on withdrawals later. This can be a powerful tax-planning tool, but it’s important to consider the immediate tax hit from the conversion.

Planning for RMDs in Retirement Planning

One of the best strategies for managing RMDs is understanding how they work and preparing early. For example, saving in a mix of traditional and Roth accounts can provide flexibility with how much taxable income you withdraw each year.

Once you need to take RMDs, consider setting up automatic withdrawals to avoid accidentally missing the deadline and risking penalties. But don’t take a "set it and forget it" approach—review your withdrawal strategy, RMD amounts and overall financial plan annually to make sure they align with your income needs and tax situation.

The Bottom Line

RMDs may not be a concern if you plan to withdraw from your retirement accounts anyway. But they can increase your taxable income for the year, potentially pushing you into a higher tax bracket and affecting Social Security taxation and Medicare premiums. Additionally, mandatory withdrawals can limit the long-term growth of your retirement savings by reducing the amount left to grow tax-deferred.

The good news is that with a little planning, you can manage your RMDs wisely. Understanding how they work, estimating your future withdrawals and exploring tax-savvy strategies can help you keep more of your money and make the most of your retirement years.

READ MORE: 6 Expert Tips for Transitioning Into Retirement Successfully