Required Minimum Distributions Explained: What Retirees Must Withdraw and When

Required Minimum Distributions, or RMDs, are the mandatory annual withdrawals the IRS forces on owners of most tax-deferred retirement accounts once they reach a certain age. The rule exists because the government deferred tax on these accounts for decades; RMDs ensure that tax eventually gets paid. Understanding when RMDs start, how they are calculated, and how penalties work matters for anyone approaching retirement, and for adult children who inherit these accounts.

Who Has to Take RMDs, and When

RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, and most employer-sponsored plans such as 401(k)s and 403(b)s. The SECURE 2.0 Act, signed into law in December 2022, raised the starting age in two steps. According to the Internal Revenue Service, people born between 1951 and 1959 must begin RMDs at age 73, while those born in 1960 or later begin at age 75. The first RMD can be delayed until April 1 of the year after the account owner turns the applicable age, but doing so means taking two RMDs in that same calendar year, which can push the owner into a higher tax bracket.

How the Amount Is Calculated

The IRS does not ask for a flat percentage. Instead, the RMD is calculated by taking the account's fair market value as of December 31 of the prior year and dividing it by a life-expectancy factor from an IRS table, most commonly the Uniform Lifetime Table found in Publication 590-B. As the factor shrinks with age, the percentage withdrawn each year gradually rises. Account owners with a spouse more than 10 years younger who is the sole beneficiary use a different table, the Joint Life and Last Survivor Table, which typically produces a smaller required withdrawal.

• Traditional IRA owners can total the RMDs from all their IRAs and withdraw the sum from just one or several accounts, per IRS aggregation rules.
• 401(k) and 403(b) RMDs generally must be calculated and withdrawn separately from each plan; they cannot be aggregated with IRA RMDs.
• Anyone still working past the RMD age and who does not own more than 5% of the company may be able to delay RMDs from that current employer's plan under the 'still working' exception, though this does not apply to IRAs.

Penalties for Missing an RMD

Before 2023, failing to take a full RMD triggered a 50% excise tax on the shortfall, one of the harshest penalties in the tax code. SECURE 2.0 cut that penalty to 25% of the amount not withdrawn. The law also added a further reduction: if the shortfall is corrected within a two-year window defined by the IRS, the penalty drops to 10%. Account owners who miss an RMD can request a full or partial waiver of the excise tax by filing Form 5329 with a letter explaining the reasonable cause and the steps taken to fix the error, according to IRS guidance.

Roth Accounts and Charitable Giving Strategies

Roth IRAs have never required RMDs during the original owner's lifetime, since contributions were made with after-tax dollars. A newer wrinkle from SECURE 2.0 extends that treatment to designated Roth accounts inside 401(k) and 403(b) plans, effective for tax years beginning in 2024, removing a long-standing quirk that used to force Roth 401(k) holders to take RMDs unless they rolled the money into a Roth IRA first.

For IRA owners who are charitably inclined, a qualified charitable distribution, or QCD, allows a direct transfer from an IRA to an eligible charity starting at age 70½. The amount transferred counts toward satisfying the year's RMD and is excluded from taxable income, up to an annually adjusted limit set by the IRS. Because the money never touches the owner's hands, it avoids being counted as adjusted gross income, which can also help limit exposure to Medicare's income-related monthly adjustment amount, or IRMAA, surcharges.

Inherited Accounts Follow Different Rules

Beneficiaries who inherit retirement accounts are generally subject to a separate set of distribution rules established by the SECURE Act of 2019, which in most cases requires most non-spouse beneficiaries to empty the account within 10 years of the original owner's death. Spouses and a few other categories of beneficiaries have additional options. Anyone who inherits a retirement account should confirm the applicable rules with the plan administrator or a tax professional, since the details depend on the beneficiary's relationship to the deceased and whether the original owner had already begun RMDs.