What to Know About Minimum Retirement Distributions and Their Rules

Understanding minimum retirement distributions is essential for anyone planning their financial future. These distributions, known as Required Minimum Distributions (RMDs), are amounts retirees must withdraw annually from certain retirement accounts after reaching a specific age. Non-compliance with RMD rules can lead to tax penalties, making it important to understand the basics.

This article explores key aspects of RMDs, including which accounts are affected, how withdrawals are calculated, timing requirements, tax implications, consequences of non-compliance, and considerations for inherited accounts.

Accounts Subject to Distributions

Traditional Individual Retirement Accounts (IRAs) and employer-sponsored retirement plans like 401(k)s, 403(b)s, and 457(b)s are subject to RMD rules. These accounts are tax-deferred, meaning taxes are paid upon withdrawal rather than when contributions are made. The IRS mandates RMDs to ensure taxes are eventually collected on deferred earnings.

Roth IRAs are exempt from RMDs during the account holder’s lifetime because contributions are made with after-tax dollars, and withdrawals are tax-free. In contrast, Roth 401(k)s are subject to RMDs, though rolling them into a Roth IRA can eliminate this requirement. Understanding the rules for each account type is vital.

The age to begin RMDs has shifted over time. Starting in 2024, the SECURE 2.0 Act raises the RMD age to 75, providing retirees more flexibility in managing their funds.

How Distribution Amounts Are Calculated

RMD calculations are based on the account balance and life expectancy. The IRS provides life expectancy tables, such as the Uniform Lifetime Table and the Joint and Last Survivor Table, to determine the required withdrawal. Most account holders use the Uniform Lifetime Table, which aligns their age with a specific distribution period.

The account balance used in the calculation reflects the fair market value as of December 31 of the previous year. This value is divided by the distribution period from the applicable IRS table. For example, if an account balance is $500,000 and the distribution period is 24.7 years, the RMD would be approximately $20,243 for that year.

For individuals with multiple accounts, RMDs must be calculated separately for each. However, for IRAs, the total RMD can be withdrawn from one or more accounts. For 401(k)s and similar plans, the RMD must be taken individually from each account.

Required Timing

RMD timing is critical for compliance. Individuals must begin taking RMDs by April 1 of the year following the calendar year they reach the required age under the SECURE 2.0 Act, which is 75 as of 2025. This initial deadline is known as the “required beginning date.” While the first RMD can be delayed until April 1, all subsequent RMDs must be taken by December 31 annually. Delaying the first RMD results in two taxable distributions in the same year, potentially increasing tax liability.

Strategic timing of RMDs can affect overall finances, including tax liability, healthcare costs, and eligibility for certain deductions or credits. For instance, taking an RMD early in the year may provide flexibility to adjust tax withholding or estimated payments.

Tax Considerations

RMDs increase taxable income and are taxed as ordinary income, potentially pushing retirees into higher tax brackets. For example, a retiree in the 24% federal tax bracket would owe $2,400 on a $10,000 RMD.

These withdrawals can also affect the taxation of Social Security benefits. Depending on total income, up to 85% of Social Security benefits may become taxable. A comprehensive strategy that considers RMDs alongside other income sources is necessary to manage tax liability effectively. Tax-efficient withdrawal strategies, such as prioritizing accounts with lower tax implications, can help mitigate these effects.

Qualified Charitable Distributions (QCDs) offer a tax-efficient way to satisfy RMD requirements while supporting charities. Individuals aged 70½ or older can donate up to $100,000 annually directly from their IRA to a qualified charity, excluding the amount from taxable income.

Consequences for Missing a Distribution

Failing to take an RMD can result in financial penalties. Previously, the penalty for missing an RMD was 50% of the amount not withdrawn. Recent legislative changes have reduced this penalty to 25%, and further to 10% if the error is corrected promptly.

Missing an RMD complicates tax planning. The excise tax, combined with delayed income inclusion, can disrupt cash flow. To address a missed RMD, individuals must file Form 5329 and request a waiver of the penalty if the failure was due to reasonable error and corrective steps are being taken.

Inherited Accounts

RMD rules for inherited accounts depend on the beneficiary’s relationship to the original account holder and the account type. The SECURE Act of 2019 introduced significant changes, including the elimination of the “stretch IRA” for most non-spouse beneficiaries. Non-spouse beneficiaries generally must withdraw the entire account balance within 10 years of the original owner’s death. This rule applies to both traditional and Roth accounts, though Roth withdrawals remain tax-free if the account was held for at least five years.

Spousal beneficiaries have more flexibility. They may treat the inherited account as their own, roll it into an existing IRA, or leave it as an inherited account. This allows them to delay RMDs until they reach the required age. Eligible designated beneficiaries, such as minor children, disabled individuals, or those within 10 years of the decedent’s age, can use the life expectancy method to calculate RMDs, preserving some tax-deferral benefits previously available under the stretch IRA rules.