How Required Minimum Distributions Affect Retirement Accounts

The Withdrawal Rule That Catches Retirees Off Guard

A 73-year-old retiree with $1 million in a traditional IRA must withdraw approximately $37,736 in the first year—whether the money is needed or not. The IRS designed required minimum distributions to ensure tax-deferred retirement accounts eventually face taxation. Miss the deadline, and the penalty was once 50% of the amount not withdrawn. SECURE Act 2.0, signed in December 2022, reduced that penalty to 25%, and further to 10% if the error is corrected within two years. Still steep. The rules governing RMDs affect every American with a traditional IRA, 401(k), 403(b), or most other employer-sponsored retirement plans.

How the Starting Age Has Shifted

Congress has pushed the RMD starting age three times in recent decades. The original age was 70½, set when life expectancy was considerably shorter. The SECURE Act of 2019 raised it to 72. SECURE Act 2.0 moved it again to 73 starting in 2023, with a further increase to 75 scheduled for 2033.

The first RMD can be delayed until April 1 of the year following the year the account holder turns 73. But that delay means two distributions in one calendar year—the delayed first RMD and the current year's RMD—potentially pushing the retiree into a higher tax bracket.

Calculating the Distribution Amount

The math is straightforward. Divide the account balance on December 31 of the prior year by the distribution period from the IRS Uniform Lifetime Table. The table assigns a divisor based on the account holder's age.

A retiree with a $500,000 IRA balance at age 80 divides by 20.2, producing an RMD of $24,752. Each year the divisor shrinks, forcing a larger percentage out of the account. The IRS updated the Uniform Lifetime Table in 2022, using longer life expectancy projections that slightly reduced annual RMDs compared to the prior table.

Accounts Subject to RMDs—and the Roth Exception

Roth IRAs stand alone. No RMDs during the original owner's lifetime. This makes Roth IRAs uniquely powerful for estate planning and tax-free growth in later years. Every other common retirement account requires distributions:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k) and 403(b) plans
• 457(b) governmental plans
• Profit-sharing plans

Roth 401(k) accounts previously required RMDs, but SECURE Act 2.0 eliminated that requirement starting in 2024. Workers who kept funds in a Roth 401(k) no longer need to roll over to a Roth IRA to avoid forced distributions.

The Penalty for Missing an RMD

Forgetting hurts. The excise tax on missed RMDs was historically 50%—one of the harshest penalties in the tax code. SECURE Act 2.0 restructured the penalty into two tiers:

• 25% excise tax on the shortfall amount
• Reduced to 10% if the missed distribution is corrected within the "correction window" (generally by the end of the second year following the year the RMD was due)
• The correction requires taking the missed distribution and filing an amended return or the appropriate excise tax form
• The IRS has historically been willing to waive penalties when taxpayers demonstrate reasonable cause

Inherited IRA Rules After SECURE Act

The SECURE Act of 2019 eliminated the "stretch IRA" for most non-spouse beneficiaries. The new 10-year rule requires complete distribution of inherited IRA assets within 10 years of the original owner's death. No annual RMDs were initially expected during those 10 years—just full depletion by year 10. But the IRS proposed regulations in 2022 requiring annual distributions within the 10-year window if the original owner had already begun RMDs. The final rules took effect in 2025 after years of transition relief.

Exceptions to the 10-year rule exist for eligible designated beneficiaries:

• Surviving spouses (can treat as own IRA)
• Minor children of the deceased (until majority, then 10-year clock starts)
• Disabled or chronically ill individuals
• Beneficiaries not more than 10 years younger than the deceased

Qualified Charitable Distributions as a Tax Strategy

Retirees aged 70½ or older can direct up to $105,000 per year (2024 limit, indexed to inflation) from an IRA directly to a qualified charity. The QCD satisfies the RMD requirement without adding to adjusted gross income. This matters beyond income tax. Lower AGI can reduce Medicare Part B and Part D premiums, decrease the taxable portion of Social Security benefits, and preserve eligibility for various deductions and credits tied to income thresholds.

The transfer must go directly from the IRA custodian to the charity. Withdrawing funds first and then donating does not qualify.

Strategic Approaches to Managing RMDs

Tax-aware retirees use several strategies to reduce future RMD burdens:

• Roth conversions before age 73—converting traditional IRA funds to Roth in lower-income years shifts assets out of RMD-subject accounts
• Tax-bracket management—converting just enough each year to fill the current bracket without jumping to the next
• Donating via QCDs to satisfy RMDs without increasing taxable income
• Consolidating multiple IRAs to simplify RMD calculations (RMDs from multiple IRAs can be aggregated and taken from a single account)

The years between retirement and age 73 represent a window. Taxable income often drops after leaving employment but before RMDs and Social Security kick in at full force. Roth conversions during this gap can produce decades of tax-free growth.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Individual circumstances vary significantly. Consult a qualified financial professional for personalized guidance.