How Required Minimum Distributions (RMDs) Work in Practice

How RMDs work in practice

Required Minimum Distributions (RMDs) force an annual withdrawal from most tax-deferred accounts so the IRS eventually collects tax on earnings that grew tax-deferred. The practical pieces you need to know are: which accounts are covered, when withdrawals must start, how to calculate the minimum, and the penalties for not complying.

Which accounts are subject to RMDs?

• Traditional IRAs, SEP IRAs and SIMPLE IRAs
• Employer plans: 401(k), 403(b), governmental 457(b) plans (varies by plan)
• Some inherited retirement accounts (special rules apply)

Roth IRAs are exempt from RMDs during the original owner’s lifetime. However, beneficiaries of inherited Roth IRAs generally must follow inherited account distribution rules (see the inherited-IRA section below).

(Authoritative source: IRS Retirement Topics – Required Minimum Distributions (RMDs).) [https://www.irs.gov/retirement-plans/retirement-topics-required-minimum-distributions-rmds]

When do you start taking RMDs?

Under current law (SECURE 2.0 and subsequent IRS guidance), the RMD age is 73 for most people as of 2025. That means you generally must take your first RMD by December 31 of the year you turn 73, except for the special “still working” exception for employer plans described below.

Important exceptions and timing details:

• If you’re still employed at an employer that sponsors your 401(k) and you do not own 5% or more of that business, many plans allow you to delay RMDs from that employer plan until you retire. That exception does not apply to IRAs.
• The “first-year” RMD can be delayed until April 1 of the year after you reach the RMD age, but doing so creates two RMDs in the same tax year (the delayed first-year RMD and the current-year RMD), which can raise your taxable income for that year.

(See IRS guidance and your plan documents before delaying withdrawals.)

How RMDs are calculated

1. Determine the account balance: use the fair market value of the account(s) as of December 31 of the preceding year.
2. Find the distribution period: use the IRS Uniform Lifetime Table to find the life expectancy (distribution period) based on your age. If your spouse is the sole beneficiary and is more than 10 years younger, you may use the Joint Life and Last Survivor Table.
3. Divide: Account balance ÷ distribution period = the RMD for that account.

Example: A 73-year-old with $500,000 in a traditional IRA uses a distribution period of roughly 27.2 (Uniform Lifetime Table — check the current IRS table). $500,000 ÷ 27.2 ≈ $18,382 — that would be the RMD for that account for the year.

Note: If you have multiple IRAs, you calculate each account’s RMD but may withdraw the combined RMD total from any one or more of your IRAs. For employer plans (like 401(k)s), RMDs are calculated for each plan and must generally be taken from each plan separately unless the plan allows aggregation.

(IRS source: Retirement Plan Distributions and the Uniform Lifetime Table.)

Penalties for missing an RMD (and recent changes)

Previously, the IRS imposed a 50% excise tax on the amount not distributed as required. SECURE 2.0 and later IRS guidance reduced that penalty: the excise tax was decreased to 25% of the shortfall, and if the shortfall is corrected in a timely manner under IRS procedures, the penalty can be reduced to 10% (see IRS notices and Publication on RMDs for exact conditions). Always check the latest IRS guidance because penalty relief options and safe harbor correction windows can change.

How inherited IRAs and the 10‑year rule work (brief)

Rules differ dramatically for beneficiaries. The SECURE Act of 2019 replaced the old lifetime-distribution rules for many non-spouse beneficiaries with a 10-year rule: most beneficiaries who inherited accounts from owners who died after 2019 must deplete the inherited account by the end of the 10th calendar year following the year of death. Special rules remain for eligible designated beneficiaries (for example, surviving spouses, minor children of the account owner, chronically ill individuals) and for certain older inherited accounts.

Because inherited-IRA rules are complex and highly fact-dependent, I always recommend beneficiaries consult a tax pro before taking distributions.

(Authoritative sources: IRS guidance on inherited IRAs and SECURE Act changes.)

Practical planning strategies I use with clients

In my 15+ years advising retirees, these are the consistent, practical approaches I recommend and implement:

1. Roth conversions during low-income years

• Convert portions of a traditional IRA to a Roth IRA while your taxable income is lower. That conversion triggers income tax in the year of conversion but reduces future RMDs because converted funds no longer carry pre-tax balances. See our deeper guides on Roth conversions for step-by-step planning and bracket management: “Roth Conversion Roadmap: When and How to Convert for Retirement” and “How Roth Conversions Affect Your Tax Bracket.” (Internal links below.)

1. Qualified Charitable Distributions (QCDs)

• If you’re 70½ or older (QCD age rules historically applied earlier; check current IRS age rules for QCDs), you can direct up to $100,000 per year from an IRA directly to a qualified charity as a QCD. A QCD counts toward your RMD and is excluded from taxable income — a powerful tactic to reduce taxable income for donors who itemize or who want to lower AGI. Confirm current QCD age and limits with the IRS before using this strategy.

1. Manage tax brackets with partial distributions

• Rather than taking lump-sum RMDs that spike your taxable income, consider taking modest additional withdrawals in years with lower taxable income or taking Roth conversions in stages to smooth tax liability.

1. Aggregate IRA withdrawals when helpful

• If you have multiple traditional IRAs, you may aggregate RMDs and withdraw the total from one or more IRAs (aggregation does not apply to 401(k) plans). I’ve used this to simplify cash flow and coordinate reinvestment into taxable accounts.

1. Coordinate RMDs with Social Security and Medicare

• Larger RMDs can push income high enough to increase Medicare Part B/D premiums (IRMAA) and taxation of Social Security benefits. Model the net effect before taking large distributions.

Real-world example (practical application)

Client example: A 74-year-old client had a $900,000 traditional IRA and $200,000 in a 401(k) plan. We:

• Calculated yearly RMDs for each account using prior-year balances and the Uniform Lifetime Table;
• Converted $50,000 in 2024 from the IRA to a Roth while the client had unusually low taxable income; the conversion cost taxed now but reduced future RMDs;
• Used a QCD of $20,000 to satisfy part of the RMD while keeping taxable income lower for Medicare premium calculations.

The combined effect: smoother tax brackets, lower future mandatory withdrawals, and reduced exposure to higher Medicare premiums.

Common mistakes I see

• Missing the RMD deadline or relying on the wrong age. Even minor misunderstandings about timing can trigger excise taxes.
• Forgetting employer-plan rules — deferring an RMD from a 401(k) while still working is allowed only under specific conditions.
• Treating Roth IRAs as always RMD-free for beneficiaries — which is not the case once the account is inherited.
• Failing to model RMDs’ impact on Medicare premiums and Social Security taxation.

Quick checklist before year-end

• Verify prior-year 12/31 account balances used for calculation.
• Confirm the applicable IRS life-expectancy table (Uniform or Joint and Last Survivor).
• Decide whether to delay an initial RMD (and understand the two-RMD effect).
• Check whether your 401(k) plan allows employer-plan deferral while still working.
• Consider Roth conversion windows or QCDs if tax-efficient this year.

Where to get authoritative answers

• IRS — Retirement Topics: Required Minimum Distributions (RMDs): https://www.irs.gov/retirement-plans/retirement-topics-required-minimum-distributions-rmds
• IRS notices and publications on RMD penalty relief and inherited IRAs (search the IRS site for the latest updates).

For additional guidance on Roth conversions (a common RMD management strategy), see these FinHelp resources:

• Roth Conversion Roadmap: When and How to Convert for Retirement — https://finhelp.io/glossary/roth-conversion-roadmap-when-and-how-to-convert-for-retirement/
• How Roth Conversions Affect Your Tax Bracket — https://finhelp.io/glossary/how-roth-conversions-affect-your-tax-bracket/

Professional disclaimer: This article is educational and not personalized tax or investment advice. Rules for RMDs, QCDs, and inherited IRAs are complex and change periodically. Consult a tax professional or fiduciary financial advisor before implementing strategies that affect your retirement accounts.

If you want, I can run a sample RMD calculation for your accounts or draft a simple Roth conversion schedule based on your projected income and tax brackets.