There's a date circled on every retirement planner's calendar: the year you turn 73. That's when the IRS stops being patient about the tax-deferred money sitting in your traditional retirement accounts and demands you start taking withdrawals, whether you need the money or not.
Required Minimum Distributions (RMDs) represent one of the most consequential retirement tax rules, yet many people approaching this milestone don't fully understand how they work or the strategies available to minimize their impact. Getting this wrong can mean penalties, unnecessarily high taxes, and complications that ripple through your entire financial plan.
Here's what you need to know to navigate RMDs strategically.
What Are Required Minimum Distributions?
RMDs are mandatory annual withdrawals the IRS requires from tax-deferred retirement accounts once you reach a certain age. The government gave you a tax break when you contributed to these accounts. Now they want their cut.
When RMDs begin: RMDs start at age 73 (per the SECURE 2.0 Act). The age was previously 72, and before that, 70½.
Which accounts require RMDs:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k), 403(b), and 457(b) plans
- Inherited retirement accounts (with different rules)
Which accounts don't require RMDs:
- Roth IRAs (during the owner's lifetime)
- Roth 401(k)s
How RMD Amounts Are Calculated
Your RMD is calculated by dividing your account balance as of December 31 of the previous year by a life expectancy factor from IRS tables.
The formula: Account Balance on Dec 31 / Distribution Period = RMD
Example: If your traditional IRA balance was $500,000 at the end of the prior year and you're age 73, your distribution period from the IRS Uniform Lifetime Table is 26.5 years. Your RMD would be $500,000 26.5 $18,868.
Important details:
- The distribution period gets shorter each year (meaning larger RMDs as you age)
- If you have multiple IRAs, you calculate each separately but can take the total from one or more IRAs
- For 401(k)s, you must calculate and withdraw from each account separately
The First-Year Exception
You have until April 1 of the year following the year you turn 73 to take your first RMD. This gives you extra time, but be careful.
The trap: If you delay your first RMD until April 1, you'll have to take two RMDs in that year: your first-year RMD by April 1, and your second-year RMD by December 31. This bunching can push you into a higher tax bracket.
The strategy: For most people, it's better to take your first RMD by December 31 of the year you turn 73, spreading the tax impact across two years rather than doubling up.
The Penalty for Missing RMDs
The IRS takes RMDs seriously. The penalty for failing to take your full RMD used to be a devastating 50% excise tax on the amount you failed to withdraw. SECURE 2.0 reduced this to 25% (and potentially 10% if corrected quickly), but it's still substantial.
Example: If your RMD was $20,000 and you only withdrew $10,000, you'd owe a 25% penalty on the $10,000 shortfall. That's a $2,500 penalty, plus you'd still owe income tax on the distribution.
How to avoid penalties:
- Set calendar reminders well before December 31
- Work with your financial advisor or custodian to calculate RMDs accurately
- If you have multiple accounts, track each carefully
- Automate distributions if possible
Tax Implications of RMDs
RMDs are fully taxable as ordinary income. This can create several tax challenges:
Challenge 1: Higher Tax Brackets
Large RMDs can push you into higher federal and state tax brackets. A couple comfortably in the 12% bracket could find themselves in the 22% or 24% bracket once RMDs begin.
Challenge 2: Social Security Taxation
RMDs increase your adjusted gross income, which can cause more of your Social Security benefits to become taxable (up to 85%.
Challenge 3: Medicare IRMAA Surcharges
Higher income from RMDs can trigger Income-Related Monthly Adjustment Amounts on Medicare Part B and Part D premiums. These surcharges are based on your tax return from two years prior and can add $1,000 – 6,000 to annual premiums per person.
Challenge 4: State Taxes
Most states tax RMDs as ordinary income, though a few (like Pennsylvania) exempt retirement income from state taxes.
Strategies to Minimize RMD Impact
Strategy 1: Start Roth Conversions Before RMDs Begin
Converting traditional IRA funds to Roth IRAs before age 73 reduces your future RMD amounts. You'll pay taxes on the conversion now, but Roth IRAs don't have RMDs during your lifetime, and qualified withdrawals are tax-free.
Optimal window: Ages 6272, especially if you've retired and are in lower tax brackets before Social Security and RMDs begin.
Strategy 2: Use Qualified Charitable Distributions (QCDs)
If you're charitably inclined, QCDs allow you to donate up to $111,000 per year directly from your IRA to charity. The distribution counts toward your RMD but is excluded from taxable income.
Benefit: You satisfy your RMD without increasing your AGI, which helps avoid Social Security taxation and Medicare surcharges.
Strategy 3: Delay Retirement Account Contributions Until After 73
If you're still working at 73, you can delay RMDs from your current employer's 401(k) (but not IRAs) as long as you don't own more than 5% of the company. This strategy works well for those who continue working past 73.
Strategy 4: Strategic Withdrawal Timing
Take RMDs early in the year when possible. This gives the distributed funds more time outside the account for reinvestment and provides flexibility if markets decline later in the year.
Strategy 5: Reinvest What You Don't Need
If you don't need your RMD for living expenses, reinvest it in a taxable brokerage account. While you'll pay taxes on the distribution, the funds can continue growing. Consider tax-efficient investments like municipal bonds or low-turnover index funds.
Strategy 6: Consider Qualified Longevity Annuity Contracts (QLACs)
A QLAC allows you to invest up to $210,000 from your IRA into a deferred annuity that doesn't begin payments until age 85. This amount is excluded from your RMD calculation, reducing annual RMDs.
Trade-off: You're exchanging liquidity for lower RMDs and guaranteed future income.
RMDs for Inherited IRAs
Inherited IRA RMD rules changed dramatically with the SECURE Act. Non-spouse beneficiaries generally must withdraw the entire account within 10 years (the "10year rule"), though annual RMDs may be required during those 10 years depending on when the original owner died.
- Spouse beneficiaries have more flexibility:
- Treat the IRA as their own (restart RMDs at their own age 73
- Remain a beneficiary and take RMDs based on their own life expectancy Take the full balance within 10 years
Special Situations
Still Working at 73
If you're still working at your employer and don't own more than 5% of the company, you can delay RMDs from that employer's 401(k) until you retire. IRAs still require RMDs.
Multiple Retirement Accounts
- Multiple IRAs: Calculate RMDs for each separately, but you can take the total from one or more accounts
- Multiple 401(k)s: Must calculate and withdraw separately from each plan
Aggregating RMDs
You can aggregate RMDs from multiple traditional IRAs and take the total from one or more accounts. You cannot aggregate 401(k) RMDs. Each requires its own distribution.
Planning Ahead: Pre-RMD Strategies
The best time to plan for RMDs is before they begin. In your 60s and early 70s:
- Review your retirement account balances: Project what your RMDs will be at 73
- Consider Roth conversions: Convert in low-income years to reduce future RMDs
- Evaluate charitable giving: If you donate regularly, plan to use QCDs once eligible
- Coordinate with Social Security claiming: Delaying Social Security to 70 may create lower-income years ideal for Roth conversions
- Assess tax bracket management: Model how RMDs will impact your marginal tax rate
Common Mistakes to Avoid
- Forgetting about old 401(k)s: That 401(k) from a previous employer requires RMDs too. Consolidating accounts can simplify tracking.
- Not coordinating among multiple accounts: If you have an IRA, a 401(k), and a 403(b), each may have different RMD rules.
- Taking RMDs from the wrong account: You can't take your 401(k) RMD from your IRA, or vice versa.
- Missing the December 31 deadline: Unlike many tax rules with April deadlines, RMDs are due by December 31 (except the first year).
- Failing to update beneficiaries: RMD rules for inherited accounts are complex. Ensure your beneficiary designations are current and coordinate with your estate plan.
Next Steps
RMDs are a fact of retirement life, but with strategic planning, you can minimize their tax impact and potentially use them to support your financial goals, whether through charitable giving, tax-efficient reinvestment, or coordinated withdrawal strategies.
If you're within five years of age 73, now is the time to model your future RMDs, explore Roth conversion opportunities, and develop a comprehensive distribution strategy that minimizes lifetime taxes while supporting your retirement income needs.
Disclosures
This article was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
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