Required Minimum Distributions and Taxes: What You Need to Know

As you approach retirement, transitioning from saving to spending is one of the most significant financial shifts you’ll face. While it’s a rewarding milestone, it comes with new challenges—especially regarding taxes. If you have tax-deferred retirement accounts like a 401(k) or a traditional IRA, required minimum distributions (RMDs) can significantly impact your financial plan.

Understanding how RMDs work and their tax implications can help you avoid costly mistakes and minimize the amount you owe. Let’s break down everything you need to know.

What are required minimum distributions (RMDs)?

RMDs are the minimum amounts you must withdraw from certain retirement accounts each year, starting at a specific age. These withdrawals are mandatory because the IRS eventually wants to collect the taxes you deferred when contributing to these accounts.

Which accounts require RMDs?

RMDs apply to the following tax-deferred retirement accounts:

Traditional IRAs : These accounts are subject to RMDs once you reach the required age.

SEP IRAs and SIMPLE IRAs : Employer-sponsored IRAs also follow RMD rules.

401(k), 403(b), and 457(b) plans : These workplace retirement plans (excluding Roth accounts) require RMDs.

Other tax-deferred retirement plans : Any account that provides tax-deferred growth may be subject to RMDs.

Changes under the SECURE Act 2.0:

The law, signed in 2022, raised the RMD starting age:

• If you were born in 1950 or earlier, your RMDs began at age 72 (or 70½ if you turned 70½ before 2020).
• If you were born in 1951-1959, your RMDs start at age 73.
• If you were born in 1960 or later, your RMDs will start at age 75.

What about Roth accounts?

Before 2024, Roth 401(k) accounts were subject to RMDs. However, starting January 1, 2024, the SECURE Act 2.0 eliminated RMDs for Roth 401(k)s, aligning them with Roth IRAs, which have never been subject to RMDs during the account owner’s lifetime.

How are RMDs calculated?

The amount you must withdraw each year is based on your account balance and life expectancy. The IRS provides a Uniform Lifetime Table to determine your RMD factor, a divisor based on age.

Formula: RMD = Account balance ÷ Life expectancy factor

Example: If you are 75 years old with an account balance of $500,000 and a life expectancy factor of 24.6, your RMD would be: $500,000 ÷ 24.6 = $20,325.20

Special case: If your spouse is more than 10 years younger and is the sole beneficiary, the Joint Life and Last Survivor Expectancy Table may allow for smaller RMDs.

What happens if you don’t take an RMD?

Failing to take an RMD on time can result in a severe tax penalty. Previously, the penalty was 50% of the amount you should have withdrawn. However, the SECURE Act 2.0 reduced this to 25%, and if you correct the mistake promptly, the penalty can be further reduced to 10%.

Ensure you take your RMD by December 31 each year to avoid penalties. The only exception is for your first RMD, which can be delayed until April 1 of the following year, but delaying means taking two RMDs in the same year, potentially increasing your tax bill.

How are RMDs taxed?

Since tax-deferred retirement accounts were funded with pre-tax dollars, RMDs are considered taxable income in the year they are withdrawn. They are taxed at your ordinary income tax rate, not the lower capital gains tax rate.

Depending on the size of your RMD and other income sources, your withdrawal could push you into a higher tax bracket, increasing the taxes owed on your Social Security benefits and potentially triggering Medicare premium surcharges.

Strategies to reduce RMD taxes

While RMDs are unavoidable, there are strategies to manage their impact on your tax bill.

Convert to a Roth IRA : Since Roth IRAs are not subject to RMDs, converting some of your traditional IRA or 401(k) funds into a Roth before reaching RMD age can reduce future required withdrawals. This strategy is most effective if you convert during lower-income years.

Delay Social Security : If you can afford to delay claiming Social Security until age 70, you may reduce the amount of taxable income in your early retirement years. This creates a window where you can take withdrawals or Roth conversions at lower tax rates before RMDs begin.

Use qualified charitable distributions (QCDs) : If you’re charitably inclined, a qualified charitable distribution allows you (in 2025) to donate up to $108,000 per year directly from your IRA to a qualified charity. This donation satisfies your RMD but does not count as taxable income.

Withdraw strategically before RMD age : Instead of waiting until RMDs force large withdrawals, consider taking strategic distributions in your 60s. By withdrawing funds earlier and spreading the tax burden over multiple years, you may avoid being pushed into a higher tax bracket later.

Manage tax withholding : To prevent a surprise tax bill, ensure you’re withholding enough taxes from your RMDs. IRA withdrawals default to 10% federal withholding, but you can adjust this by completing IRS Form W-4P.

How RMDs impact Medicare premiums

Many retirees are surprised to learn that RMDs can increase their Medicare Part B and Part D premiums. Medicare uses modified adjusted gross income (MAGI) from two years prior to determine premium costs. If your RMDs push you over a certain income threshold, you may be subject to income-related monthly adjustment amounts (IRMAA), essentially higher Medicare premiums.

Example: In 2025, if your MAGI exceeds $106,000 for single filers or $212,000 for married filers, you will pay more for Medicare.

These thresholds have been adjusted for inflation.

Surcharges are determined based on your MAGI from two years prior. 2025 premiums are based on your 2023 income.

Managing RMDs strategically can help you avoid unnecessary increases.

Final thoughts

RMDs are a critical part of retirement planning. Understanding their tax implications can help you keep more of your savings. With careful planning—whether through Roth conversions, charitable donations, or strategic withdrawals—you can minimize the tax impact and ensure your RMDs align with your overall retirement goals.