Understanding RMDs: What They Are, When They Start, and Why They Matter

Scenario

"I thought once I retired and stopped making money, my taxes would go down and stay down," Barbara told her advisor. She was 71, two years from her first Required Minimum Distribution, and looking at a projection that showed her taxable income actually increasing in her mid-70s, without any change in lifestyle spending.

What was driving the increase? Her traditional IRA had continued to grow through her early retirement years, and at 73, the IRS would begin requiring annual distributions: amounts calculated to draw down the account over her remaining life expectancy according to government tables.

"Nobody warned me that my taxes could go up in retirement," she said.

Many retirees are in Barbara's position, and the earlier they understand RMDs, the more options they have to plan around them.

The Concept

Required Minimum Distributions are the IRS mechanism for collecting taxes on pre-tax retirement savings that have been sheltered for decades. Traditional IRAs, traditional 401(k)s, 403(b)s, and most other employer-sponsored retirement accounts are subject to RMD rules.

The basic rule: starting at age 73 for individuals who turned 72 after December 31, 2022 (per the SECURE 2.0 Act, signed into law December 29, 2022), you must withdraw a minimum amount from these accounts each year. The required amount is calculated by dividing your account balance as of December 31 of the prior year by a life expectancy factor from the IRS Uniform Lifetime Tables.

Roth IRAs are not subject to RMDs during the account owner's lifetime, which is one reason preserving and growing Roth assets is often a planning priority.

Failure to take a required distribution results in a penalty, which is currently 25% of the amount that should have been withdrawn (reduced to 10% if corrected promptly).

Example

Let's look at how RMDs grow over time. Suppose Richard has a traditional IRA worth $1 million at age 73. His life expectancy factor from the IRS Uniform Lifetime Table is 26.5, so his first RMD is approximately $37,736.

If his IRA continues to grow at a moderate rate even as he takes distributions, the balance at 80 might be $1.1 million. The life expectancy factor at 80 is 20.2, so his RMD at 80 is approximately $54,455. By 85, the factor is 16.0; a $1.2 million balance would produce an RMD of $75,000.

If Richard doesn't need all of this income for spending, he is still required to take it and pay ordinary income tax on it. Combined with Social Security and other income, a large RMD can move a retiree into a higher bracket, make more of their Social Security taxable (up to 85%), and trigger IRMAA surcharges.

Strategy

Planning approaches that may reduce the long-term impact of RMDs include:

• Roth conversions before age 73. As discussed in our previous article, converting portions of a traditional IRA to a Roth in lower-income years reduces the future IRA balance subject to RMDs.
• Qualified Charitable Distributions (QCDs). If you're charitably inclined and over 70½, you can direct up to $$111,000 annually (as of 2026, indexed for inflation) from your IRA directly to a qualified charity. This satisfies your RMD without adding to your taxable income.
• Strategic earlier withdrawals. Taking IRA withdrawals in years before 73, even if you do not strictly need the income, may reduce future RMDs if done intentionally as part of a bracket management strategy.
• Aggregating accounts. If you have multiple IRAs, your RMDs can be calculated separately but taken from one account, providing some flexibility in which assets you liquidate.

Common Mistake

The most common mistake is simply ignoring RMDs until they arrive. Retirees who spend their early retirement years living primarily off Social Security and brokerage accounts while their traditional IRA grows untouched may find themselves facing very large RMDs in their mid-70s, which are much harder to plan around than they would have been a decade earlier.

A second mistake is missing the first RMD deadline. Your first RMD can be delayed until April 1 of the year after you turn 73, but doing so means taking two RMDs in that calendar year (the delayed first one and the regular second one), which can significantly increase your taxable income for that year.

Key Takeaway

Understanding RMDs and planning around them before age 73, through Roth conversions, charitable giving, or strategic earlier withdrawals, may meaningfully reduce your lifetime tax burden and prevent unpleasant surprises in your mid-retirement years.

Sources & References

1. Internal Revenue Service. Publication 590-B: Distributions from Individual Retirement Arrangements. Life expectancy factors from the Uniform Lifetime Table. irs.gov.
2. Consolidated Appropriations Act, 2023 (SECURE 2.0 Act), Division T, signed December 29, 2022. RMD age increased to 73 for individuals who turn 72 after December 31, 2022.