Required Minimum Distributions: What to Know

One of the most effective ways to plan for retirement is by saving and investing in tax-advantaged accounts, such as a 401(k) or traditional IRA. These allow you to build toward retirement while using compound interest and consistent contributions. However, some of these accounts, like the ones we mentioned earlier, force you to take distributions once you turn a certain age.

Required minimum distributions (RMDs) are an important detail to consider when you invest in certain tax-advantaged accounts. In this article, we’ll explain how they work and why the rule is in place. You’ll also learn about any exceptions to the rule which may apply to you. Finally, we’ll break down how RMDs may impact your retirement plan directly.

What Are RMDs?

A required minimum distribution (RMD) is a minimum amount that the U.S. government requires you to withdraw from your tax-advantaged savings account once you reach a certain age. These apply to both the traditional IRA and various employer-sponsored plans, such as the 401(k). After you pass the age, you must make distributions each year, provided there are still funds within the account.

In 2022, Congress passed the Secure Act 2.0, which set the RMD age threshold to 73 years old beginning in 2023 (before that, the age was 72 years old). And, starting in 2033, the age goes up to 75 years old. This means that, once you reach this age, you must take RMDs from eligible accounts.

RMD laws apply to both various types of IRAs and employer-sponsored plans. Below is a list outlining all of the accounts that require distributions:

• Traditional IRA. This is a tax-deferred retirement account that allows you to contribute up to a certain limit of earned income each year.
• SEP IRA. These accounts are IRAs that employers contribute to for themselves and their employees. They mainly operate like a traditional IRA when it comes to tax laws and withdrawals.
• SIMPLE IRA. With this arrangement, both the employer and its employees may contribute to an IRA. Much like the last two account types, accountholders must pay income taxes on withdrawals.
• 401(k). This is an employer-sponsored defined contribution plan that allows employees to contribute funds from their pay. Often, employers match contributions as well. When one makes a withdrawal, they are subject to federal income taxes.
• 403(b). These are tax-sheltered annuity accounts that cater to public-school and, in some cases, non-profit organization employees. Like with a 401(k), earnings and contributions grow tax deferred.
• 457(b). This is a tax-advantaged retirement plan sponsored by government or non-profit employers. Withdrawals are subject to income tax.

In addition to the above, for 2022 and 2023, Roth IRAs and 401(k)s require distributions when they pass on to beneficiaries after the original account owner’s death. Before that, these accounts have no RMDs, with any withdrawals being tax-free. However, as of 2024, these rules are no longer in effect.

How to Make Minimum Withdrawals

Once you turn 73, you must make RMDs from your retirement accounts (aside from a Roth IRA). These continue each year until your account is depleted. When you make withdrawals, note that you can take more than the minimum amount and whatever you do take out is now part of your taxable income. The latter consideration may impact your overall retirement plan, which we’ll touch upon later in this article.

The deadline to make RMDs is on the following April 1st from when you turn 73. Then, you must adhere to the same time frame for future years.

To calculate the amount you must withdraw annually, you must do so by “dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs),” according to Marguerita Cheng, CFP, CRPC, CSRIC, RICP, and expert contributor at Annuity.org. She adds that the “IRS updates these actuarial tables, so be sure to verify them annually.” With these tables and the information from your account, you’ll be able to calculate these yourself or with the help of a financial advisor.

Skipping RMDs: Consequences and Exceptions

Just like deciding to not pay your taxes, it’s against tax law to avoid paying RMDs. If you do this by the April 1st deadline, the Internal Revenue Service (IRS) will charge you a 25% penalty for the amount you need to withdraw. However, it’s possible to lower this amount to 10% if you take out the correct amount within two years.

There are, however, instances where you can waive or delay a required distribution. Cheng explains that those “in a workplace retirement plan (e.g., 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire, unless they’re a 5% owner of the business sponsoring the plan.”

Elizabeth Buffardi, CFP, CPA, and Founder of Crescendo Financial Planners, identifies “Roth Conversion” as another strategy you can take advantage of. Here, “you convert some or all of your pre-tax retirement plans to Roth plans.” She explains that the point of this is “because the tax rates are lower than they will be in 2026,” so you stand to “save yourself some money later.”

There are disadvantages to a Roth conversion, though. Buffardi points out that “you are paying the tax now,” which may not be ideal. On the other hand, she says, “The upside is that you are paying the tax at a lower rate than you may in the future, and once you convert that money to Roth, it has the potential to lessen your RMDs in the future.” Before committing to this strategy, she recommends you “consult your tax advisor.”

Why the Government Requires Minimum Distributions

So, why does the government require minimum distributions to begin with? Because most retirement accounts are tax-deferred, the IRS stands to collect revenue from withdrawals. Until then, the U.S. doesn’t benefit from the funds within the account.

By requiring minimum distributions each year, the government ensures that it receives tax payments. Otherwise, one may be content to leave funds in their account for as long as they’d like, minimizing taxes.

Impact on Retirement Planning

To effectively plan for retirement, one must carefully plot out their income sources and, of course, how much they pay in taxes. For this reason, RMDs throw an extra wrinkle into your post-working years because, when you do decide to take withdrawals, you will inevitably be paying ordinary income taxes. And, for some, this may be either an inconvenience or a burden to their lifestyle.

According to Buffardi, “If someone is already taking money out of their pre-tax retirement plans and those amount(s) are larger than the RMD, then the impact may not be that large or unexpected.” This is because, if you were already distributing funds, your account’s balance would have already dwindled some, lowering your RMDs down the road. However, “for those who don’t need the money and have waited to take [distributions], it can be more of an annoyance than anything.” She recommends speaking with your “tax advisor” any time “you are taking a new amount or a larger amount out of your pre-tax retirement plan” because “you may end up in a higher tax bracket than you have been in the past.”

Because an RMD counts toward your taxable income, it can also affect the government benefits you’ve been relying on in retirement. This includes Medicare and your Social Security. For the latter, your payments may end up being taxed as high as 85% if you withdraw more than $34,000 (or $44,000 for a joint tax return).

Frequently Asked Questions

Do RMDs affect Social Security?

Yes, your distributions from your retirement accounts impact your government benefits, such as Social Security and Medicare. This is because RMDs and other withdrawals count toward your taxable income. In the case of Social Security, you may have to pay additional taxes on your benefits if your income increases past a certain threshold.

Does a 403(b) have RMDs?

With a 403(b), you will have to make distributions once you turn 73 years old. And like with 401(k)s, your withdrawals are taxable as ordinary income at your tax bracket at the time.

Is an RMD taxable?

RMDs are taxable as ordinary income when it’s for a tax-deferred IRA or an employer-sponsored retirement plan, such as a 401(k) or 403(b).

How does the IRS know that I took my RMD?

Each year, you must report your RMD on your Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Additionally, you must pay taxes on your distributions, which alerts the IRS to your activity regarding your account(s).