Do Required Minimum Distributions Count as Taxable Income?
Explore the tax treatment of Required Minimum Distributions and how these mandatory withdrawals integrate with your overall retirement tax plan.
A Required Minimum Distribution (RMD) is a mandatory annual withdrawal from most retirement accounts for individuals who have reached age 73. The government requires these withdrawals because it does not permit the tax deferral on these funds to last forever. For those in or approaching retirement, a common question is how these withdrawals are taxed. In nearly all situations, the amount withdrawn to satisfy an RMD is considered taxable income.
The Taxation of Required Minimum Distributions
Funds withdrawn to meet an RMD are taxed as ordinary income, not at the lower long-term capital gains rates. The distribution amount is added to your other income for the year, such as wages or interest. The specific tax rate applied depends on your total taxable income and filing status.
Because RMDs increase your total taxable income, they can push you into a higher marginal tax bracket. Financial institutions do not automatically withhold taxes on RMDs unless you request it. It is important to plan for the potential tax liability to avoid an unexpected bill or underpayment penalties when you file your annual return.
When an RMD Is Not Fully Taxable
While RMDs are generally taxable, certain circumstances can result in a portion of the distribution being tax-free. This most commonly occurs with retirement accounts that hold after-tax, or nondeductible, contributions. If you made contributions to a traditional IRA with money that had already been taxed, a part of your RMD is treated as a tax-free return of your principal.
To determine the nontaxable portion, the IRS requires a pro-rata calculation. This formula compares the total nondeductible contributions to the total value across all of your traditional IRAs. The resulting percentage is then applied to your distribution to find the tax-free amount, which is reported to the IRS on Form 8606, Nondeductible IRAs.
Another method to avoid taxation on an RMD is through a Qualified Charitable Distribution (QCD). An individual age 70½ or older can direct a transfer of up to an annually indexed amount, which is $113,000 for 2025, from their IRA to an eligible charity. This distribution can satisfy all or part of their RMD and is excluded from their taxable income. It is important to note that distributions from Roth IRAs are generally tax-free, and original owners of Roth IRAs are not subject to RMDs.
How RMDs Affect Your Overall Financial Picture
An RMD increases your Adjusted Gross Income (AGI), which can create ripple effects across your finances. One significant area impacted is the taxation of Social Security benefits. The IRS uses a figure called “provisional income” to determine if your benefits are taxable. This is calculated by taking your modified AGI, adding any tax-exempt interest, and then adding one-half of your Social Security benefits.
An RMD can push your provisional income over certain thresholds, causing a larger portion of your Social Security benefits to become taxable. For a single filer, if provisional income exceeds $34,000, up to 85% of their benefits may be subject to income tax. For joint filers, that same 85% taxability can occur when provisional income surpasses $44,000.
The increase in your income can also lead to higher Medicare premiums through the Income-Related Monthly Adjustment Amount (IRMAA). IRMAA is a surcharge added to Medicare Part B and Part D premiums for retirees with higher incomes. The Social Security Administration determines these surcharges based on the AGI reported on your tax return from two years prior. A large RMD in one year could increase your monthly Medicare costs two years later.
Reporting RMD Income to the IRS
The process of reporting RMD income begins with Form 1099-R, which you will receive from your financial institution by January 31 of the year following the distribution. This form details the withdrawal and provides key information for your tax return.
Form 1099-R shows the gross distribution, the taxable amount as determined by the payer, and a distribution code. You will use this information to report the income on your Form 1040 or 1040-SR. If a portion of your distribution is not taxable, you must also file Form 8606 to show the calculation of the nontaxable amount.