Retiree reviewing retirement account statement with RMD highlighted in bold”

What Are Required Minimum Distributions (RMDs) and How Do They Work?

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The IRS Wants Its Share

You’ve been saving diligently in your retirement accounts for decades — stuffing money into 401(k)s, IRAs, 403(b)s, and SEP IRAs. The beauty of these accounts is that they grow tax-deferred. But the IRS isn’t going to let you keep that money sheltered forever.

At some point, Uncle Sam comes knocking. Enter Required Minimum Distributions (RMDs) — the annual withdrawals you must take from your retirement accounts whether you need the money or not.

Let’s break down what RMDs are, when they start, how they’re calculated, what happens if you miss one, and strategies to keep taxes from eating too much of your nest egg.

1. What Are RMDs?

An RMD is the minimum amount you must withdraw each year from certain retirement accounts once you hit a specific age. Currently age 73 or 75 depending on your birth year. 

Why do they exist?

  • Pre-tax retirement accounts (like Traditional IRAs and 401(k)s) were never meant to be permanent tax shelters.

  • The IRS wants its share of taxes eventually, and RMDs are how they make sure you start paying.

Accounts subject to RMDs:

  • Traditional IRA

  • SEP IRA

  • SIMPLE IRA

  • 401(k) / 403(b) / 457(b) (traditional, not Roth)

Accounts not subject to RMDs:

  • Roth IRAs (for original owners)

  • Taxable brokerage accounts

  • HSAs

2. When Do RMDs Start in 2025?

Thanks to SECURE Act 2.0, the RMD age has shifted:

  • If you were born 1951–1959, RMDs begin at age 73.

  • If you were born 1960 or later, RMDs begin at age 75.

Deadlines:

  • Your first RMD: By April 1 of the year after you hit RMD age.

  • Every RMD after that: By December 31 of each year.

Warning: If you delay your first RMD until April 1, you’ll take two RMDs in that year (your delayed one plus that year’s normal one). That could bump you into a higher tax bracket.

3. How Are RMDs Calculated?

The formula is straightforward:

RMD = Account Balance (as of Dec 31 last year) ÷ Life Expectancy Factor (IRS table)

  • At age 73, the divisor is ~26.5.

  • At age 80, the divisor is ~20.2.

  • The older you get, the smaller the divisor — which means your RMD percentage goes up.

Example:

  • IRA balance = $1,000,000

  • At age 73, divisor = 26.5

  • RMD = $1,000,000 ÷ 26.5 = ~$37,735 required withdrawal

That amount is fully taxable as ordinary income.

4. What Happens If You Don’t Take an RMD?

This is one rule you don’t want to ignore.

  • Missed RMDs trigger a 25% penalty on the amount you failed to withdraw.

  • If you catch the mistake quickly and correct it, the penalty drops to 10%.

Example:

  • Required RMD = $20,000

  • You forgot to take it.

  • Penalty = $5,000 (25%), or $2,000 if fixed quickly.

Lesson: Missing an RMD is one of the costliest retirement mistakes.

5. Strategies to Manage RMDs

Roth Conversions Before RMD Age

  • Move money from pre-tax accounts into a Roth IRA in low income years. 

  • Pay tax now, avoid future RMDs.

  • Roth withdrawals are tax-free, giving you flexibility later.

Qualified Charitable Distributions (QCDs)

  • If you’re 70½ or older, you can donate directly from your IRA to a qualified charity.

  • Up to $100,000/year can count toward your RMD while being excluded from taxable income.

  • Great for charitably inclined retirees.

Tax Bracket Management

  • Spread withdrawals or Roth conversions across multiple years to avoid spiking into higher brackets.

  • Example: Converting $50,000/year for five years may be better than converting $250,000 in one year.

Smart Contribution Choices

  • In your later career, consider whether maxing out pre-tax accounts makes sense.

  • Roth 401(k) or taxable investments may give you more flexibility and reduce future RMD headaches.

6. Common Mistakes to Avoid

  • Aggregating incorrectly:

    • IRAs: You can calculate each account’s RMD, then withdraw the total from just one.

    • 401(k)s: You must take RMDs from each plan separately.

  • Forgetting the first deadline:

    • If you delay until April 1, you’ll have two RMDs in that same year.

  • Thinking Roth IRAs have RMDs:

    • They don’t — but inherited Roth IRAs do(not taxable).

  • Missing QCD opportunities:

    • Many retirees pay unnecessary taxes because they don’t use charitable giving to reduce RMD impact.

Conclusion: Don’t Let RMDs Surprise You

RMDs aren’t optional — they’re the IRS’s way of finally collecting taxes on all those years of tax-deferred savings.

The mistake most people make is waiting until RMD age and then being shocked by the tax bill. The smart move is planning before RMDs hit — with Roth conversions, charitable giving, and proactive withdrawal strategies.

If you’re approaching RMD age and want to minimize the tax hit, let’s run the numbers together. Schedule your free consultation at TheHourlyAdvisor.com.

Q&A Section 

What accounts are subject to RMDs?
Traditional IRAs, SEP IRAs, SIMPLE IRAs, and 401(k)/403(b) accounts. Not Roth IRAs for original owners.

When do RMDs start in 2025?
At age 73 if born 1951–1959, at age 75 if born 1960 or later.

How are RMDs calculated?
Account balance (Dec 31 prior year) ÷ IRS life expectancy factor.

What is the penalty for missing an RMD?
25% penalty (reduced to 10% if corrected quickly).

Can charitable donations count toward RMDs?
Yes. Qualified Charitable Distributions (QCDs) let you donate directly from your IRA to charity and satisfy your RMD tax-free.