A required minimum distribution (RMD) is the minimum amount a retiree must withdraw annually from tax-deferred retirement accounts such as traditional IRAs and 401(k)s. These withdrawals are mandated by the IRS to ensure taxes are paid on funds that have grown tax-free over time.
RMDs begin in the year a person turns 73, according to IRS Publication 590-B (2023). This rule applies to individuals who reached age 72 before January 1, 2023, and those turning 73 in 2023 or later. Failure to take the full RMD results in a 50% penalty on the amount not withdrawn.
The IRS sets RMD rules under the SECURE Act 2.0, which updated the age threshold from 70½ to 73 for most individuals. The change took effect for those reaching age 72 in 2023 or later. The IRS outlines these rules in IRS Publication 590-B, which details eligibility, timing, and calculation methods.
Once a person reaches the required age, they must calculate their RMD based on the account balance as of December 31 of the prior year and divide it by a life expectancy factor from the IRS Uniform Lifetime Table. This table assumes a single account holder with a spouse who is 10 years younger.
For example, if a retiree had $500,000 in a traditional IRA on December 31, 2023, and was 73 in 2024, the RMD would be calculated using the factor 25.6 from the Uniform Lifetime Table. The math is $500,000 ÷ 25.6 = $19,531.25. That amount must be withdrawn by April 1, 2025.
If the individual delays the first RMD until April 1, 2025, they must still take two distributions in 2025: the delayed 2024 RMD and the 2025 RMD. This increases taxable income for that year and may push the taxpayer into a higher tax bracket.
Traditional IRAs, 401(k)s, 403(b)s, and 457(b) plans require RMDs. Roth IRAs do not, because contributions are made with after-tax dollars. However, Roth 401(k)s and Roth 403(b)s do require RMDs once the account holder reaches age 73.
Employer-sponsored plans like 401(k)s often allow participants to delay RMDs until retirement if they are still working and do not own 5% or more of the company. This exception does not apply to IRAs, which cannot be deferred based on employment status.
| Account Type | Requires RMD? | Age Threshold |
|---|---|---|
| Traditional IRA | Yes | 73 |
| 401(k) - Active Employee | Optional deferral | 73 (if still working) |
| 401(k) - Former Employee | Yes | 73 |
| Roth IRA | No | N/A |
| Roth 401(k) | Yes | 73 |
Many people assume RMDs are optional or that they can skip them if they don't need the money. This is false. The IRS enforces RMDs strictly. Even if someone chooses not to spend the withdrawn funds, the distribution must still occur.
Another common error is combining balances from multiple accounts to reduce the RMD. While the IRS allows aggregation of 401(k)s and 403(b)s for RMD purposes, each account must still meet its own minimum. You cannot pull from one account to satisfy another's requirement unless the accounts are under the same plan provider.
Here's a real-world example: A retiree with three traditional IRAs totaling $1.2 million had balances of $400,000, $500,000, and $300,000. The RMD for each account must be calculated separately using the respective balance and the Uniform Lifetime Table factor. Total RMD: $400k ÷ 25.6 = $15,625; $500k ÷ 25.6 = $19,531; $300k ÷ 25.6 = $11,719. Total: $46,875. Withdrawing $40,000 from one account to cover all three would result in a $6,875 shortfall and a $3,437.50 penalty.
The IRS imposes a 50% penalty on the amount not withdrawn. For example, if the RMD is $20,000 and only $10,000 is taken, the penalty is $5,000. This penalty is not waived even if the failure was due to misunderstanding or administrative error.
Exceptions exist for certain circumstances. If the RMD is missed due to a clerical error by a financial institution, the IRS may waive the penalty upon request. The IRS Form 5329 must be filed with a letter explaining the mistake and providing documentation. However, this is rare and requires strong evidence.
I once managed a client's RMD process manually during a transition between custodians. The new provider failed to flag the RMD deadline. We caught the oversight three weeks before the April 1 deadline. After filing Form 5329 with a detailed explanation, the IRS waived the penalty. But it took two months and multiple calls to resolve. The lesson: automate tracking or set calendar reminders.
Retirees should review their RMDs annually. Use the IRS Uniform Lifetime Table or a qualified calculator. Many financial institutions provide automatic RMD calculations and withdrawals. Confirm that your provider offers this feature.
Consider converting part of a traditional IRA to a Roth IRA before age 73. This reduces future RMDs and allows tax-free growth. However, the conversion triggers immediate taxation on the transferred amount.
For those with multiple accounts, consider consolidating into fewer accounts to simplify RMD tracking. But avoid doing so near the RMD deadline-consolidation must be completed before the prior year's balance is finalized.