Required Minimum Distributions (RMDs): What They Are and Why They Matter

If you’ve been saving for retirement in accounts like a 401(k), 403(b), or IRA, there’s an important rule you need to understand: at some point, the IRS requires you to start taking money out.

These withdrawals are called Required Minimum Distributions (RMDs). If RMDs are not handled properly, the penalties can be significant.

In this post, we’ll break down what RMDs are, why they exist, how they’re calculated, and how they can impact your retirement plan.

What Is an RMD?

A Required Minimum Distribution (RMD) is the minimum amount you must withdraw each year from certain retirement accounts once you reach a specific age.

RMDs apply to:

• Traditional IRAs
• 401(k)s
• 403(b)s
• Other pre-tax retirement accounts

These accounts were funded with pre-tax dollars, meaning you received a tax deduction upfront. Over time, the investments grew tax-deferred. But eventually, the IRS requires you to begin paying taxes on that money.

Why Do RMDs Exist?

The reason is simple: the IRS wants its share.

Since you received a tax break when contributing to these accounts, RMDs are how the government ensures those deferred taxes are eventually collected.

When Do RMDs Start?

Under current rules, RMDs generally begin at age 73.

• Your first RMD must be taken by April 1st of the year after you turn 73
• After that, RMDs must be taken every year by December 31st

Important Planning Tip

If you delay your first RMD until April 1st, you’ll still need to take your second RMD by December 31st of that same year.

👉 That means two taxable distributions in one year, which can significantly increase your taxable income.

How Are RMDs Calculated?

Your RMD is calculated using two key factors:

1. Your retirement account balance as of December 31st of the previous year
2. A life expectancy factor provided by the IRS

Example:

• Account balance: $500,000
• Life expectancy factor: 26.5

👉 RMD = $500,000 ÷ 26.5 = $18,867

Each year, the life expectancy factor decreases slightly, which means your required withdrawal amount will gradually increase over time.

Are RMDs Taxable?

In most cases, yes.

Because these accounts were funded with pre-tax dollars, RMDs are typically taxed as ordinary income.

This can have several ripple effects:

• Potentially pushing you into a higher tax bracket
• Increasing Medicare premiums (IRMAA)
• Increasing the taxation of Social Security benefits

This is why proactive tax planning before RMD age is so important.

What Happens If You Miss an RMD?

The IRS imposes a penalty if you fail to take your required distribution.

• Current penalty: 25% of the amount not withdrawn
• Potential reduction: down to 10% if corrected in a timely manner

Even at the reduced rate, this is a steep and avoidable penalty. This makes it critical to stay on top of your RMD schedule.

Do Roth Accounts Have RMDs?

Roth IRAs do not have RMDs during the original owner’s lifetime.

This is one of the reasons Roth accounts are so powerful in retirement planning:

• No required withdrawals
• Continued tax-free growth
• Greater flexibility for income planning

Why RMDs Matter for Your Financial Plan

Many retirees are surprised by how large their RMDs can be. Especially after years of saving in pre-tax accounts.

Without proper planning, RMDs can:

• Create unexpected tax burdens
• Disrupt your income strategy
• Reduce overall tax efficiency

However, with early planning, you have more control.

Strategies to Consider:

• Roth conversions before age 73
• Coordinating withdrawals across different account types
• Managing taxable income year by year

The earlier you plan, the more flexibility you have.

Final Thoughts

Required Minimum Distributions are simply the IRS’s way of saying: you’ve deferred taxes long enough, it’s time to start withdrawing.

But with the right strategy, RMDs don’t have to be a surprise, or a setback.

If you’re approaching your 70s or want to proactively plan ahead, now is the time to evaluate your options and build a tax-aware retirement strategy.

If you’d like guidance in creating a plan that aligns with your long-term goals, consider speaking with a financial professional.