A Required Minimum Distribution (RMD) is part of the federal tax code for tax-deferred retirement accounts, indicating the minimum amount that must be withdrawn annually from certain retirement accounts, such as traditional IRAs (including SEP or SIMPLE IRAs), 401(k)s, 403(b)s, or other pre-tax workplace retirement plans. RMDs are not required for Roth IRAs or Roth balances (except for inherited Roth balances) in workplace plans.
Distribution Age
RMDs start the year you turn 73 (increasing to 75 in 2033), and the RMD deadline is December 31 each year. The exception is your first RMD, which you may take by December 31 or delay until April 1 of the year following the year you turn 73. If you choose to wait until April 1 for your first RMD, it will mean taking two RMDs that year—one in April, and one by the December 31 deadline. That additional income could have tax consequences for you.
RMDs cannot be deferred to a later age past 73. However, retirement plan account owners can delay taking their plan RMDs until the year in which they retire, unless they’re a 5% owner or more of the business sponsoring the plan or the plan provides otherwise. This exception applies to workplace plans for still-working employees only, so owners of traditional IRA accounts must begin taking RMDs once the account holder reaches RMD age.
The IRS penalty for not taking an RMD on time, or for taking less than the required amount, is 25% of the amount not taken by the deadline. If the RMD is corrected within two years, the penalty for not fulfilling RMD requirements can be reduced to 10%.
RMD Calculation
The IRS uses a formula called “life expectancy factor” that takes into consideration your age, your life expectancy and your beneficiaries’ life expectancies. It then divides your prior year December 31 balance total by your “life expectancy factor” to determine the amount you must withdraw. Your “life expectancy factor” is taken from the “IRS Uniform Lifetime Table” or the “IRS Joint Life Expectancy Table” depending on your age and the age of the beneficiary of your account. Your RMD life expectancy factor changes every year, changing the distribution every year.
Distributions
If you own one IRA or retirement plan, you’ll take your distribution from that account. If you have numerous accounts, you need to know what the RMD is for each one, and then add them up, to get the final number. While you can withdraw your RMDs from multiple IRA accounts or 403(b)s, you can also withdraw the total amount from just one account.
The same isn’t true for qualified retirement plans, or plans sponsored by employers, such as 401(k)s or 457(b)s. You must take your RMD separately for each account. If you have five different 401(k)s, you will need to take your RMD from each.
Tax Considerations
A 1099-R will be issued reporting distributions taken for the year to report with your tax return. RMDs are taxed as ordinary income, and withdrawals will count toward your total taxable income for the year, subject to your marginal tax rate, as well as any applicable state and local taxes, if you reside outside of Pennsylvania. The additional income might also push you into a higher tax bracket, which could affect taxes on your Social Security benefit, as well as the cost of your Medicare premium.
Keep in mind, you can elect to have taxes withheld at the same time you take your RMD. The withholding must be 10% or more and can be adjusted according to the change in your marginal rate each year.
You can also consider donating your RMD money to charity as a qualified charitable distribution (QCD). These are direct transfers, which are free of federal income tax, and would satisfy your RMD requirement for the year (up to $108,000 annually per individual in 2025), as long as the donation is made by December 31. You do not get a charitable deduction on the Schedule A, but your RMD may be met without generating taxable income. Plus, you don’t need to itemize to take a QCD, you can still take the standard deduction. Further, recent changes from SECURE Act 2.0 allow a one-time QCD to a charitable gift annuity (up to a lifetime limit of $54,000 per individual in 2025), combining support to a favorite charity and a predictable stream of income.
Don’t assume that your retirement plan or brokerage IRA account will automatically send your RMDs for the year. Proactively contacting your account managers and keeping a list of all of your retirement accounts will mitigate possible mistakes or errors made with your distributions.
Beneficiary Distributions from IRAs
Designated beneficiaries, such as spouses or chronically/mentally ill individuals, have several options for receiving distributions from IRAs upon death of the original IRA owner. The account can be kept as an inherited account, distributed based on own life expectancy, or rolled over to their own IRA.
Non-designated beneficiaries must follow the 10-year rule regarding distributions from an IRA beginning in 2025. The IRS has provided much needed clarification regarding the rule since its inception.
- If the original owner dies before their RMD start date, beneficiaries (who are not eligible designated beneficiaries) do not have to take annual RMDs. They can choose to wait until year 10 to withdraw the money, receive yearly distributions, or skip years, as long as the IRA is fully emptied by the end of the 10-year period.
- If the original owner died on or after their RMD start date, RMDs must be paid to the non-designated beneficiary over the 10-year period, starting the year after the owner dies. Beneficiary RMDs are required in years 1 – 9, and the rest of the account must be emptied by year 10.
Distributions will be taxable as ordinary income just as non-beneficiary distributions are with the option to withhold income taxes. With the income already included in taxable income, converting all or part of the distributions to a Roth IRA could be a viable option for the additional cash flow. Feel free to contact your H2R CPA liaison and they will be happy to assist you with any questions.
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