Required Minimum Distributions (RMDs): Rules, Amounts, and Penalties

Missing an RMD Triggers a 25% Excise Tax on the Undistributed Amount

Required Minimum Distributions are one of the most consequential and most frequently misunderstood rules in retirement planning. The penalty for failing to take an RMD is 25% of the amount that should have been withdrawn — reduced to 10% if the mistake is corrected within a two-year correction window. A retiree with a $500,000 IRA who forgets to take their $20,000 RMD faces a $5,000 tax penalty, in addition to still owing income tax on the distribution when eventually taken. SECURE 2.0 raised the starting age for RMDs from 72 to 73, and a further increase to age 75 is scheduled for 2033. Understanding these rules is increasingly important as retirement account balances grow larger and the rules themselves continue to evolve.

Which Accounts Require RMDs

RMDs apply to virtually all pre-tax retirement accounts during the account owner's lifetime:

• Traditional IRAs
• SEP-IRAs and SIMPLE IRAs
• 401(k), 403(b), and 457(b) plans
• Inherited IRAs and inherited Roth IRAs (different rules apply)

Roth IRAs are the major exception — owners face no RMDs during their lifetime. Beginning in 2024, SECURE 2.0 also eliminated RMDs from Roth 401(k) accounts during the owner's lifetime, aligning them with Roth IRA rules.

When RMDs Begin

The first RMD can be delayed until April 1 of the year following the year you turn 73. However, taking this "first RMD delay" means you must take two RMDs in one calendar year — the delayed first RMD and the second RMD by December 31. Taking two RMDs in one year can push income into a higher tax bracket and affect Medicare premium calculations.

How to Calculate Your RMD

Each year's RMD is calculated by dividing your December 31 account balance of the prior year by the applicable life expectancy factor from IRS Uniform Lifetime Table III (for most retirees) or Table II (if the sole beneficiary is a spouse more than 10 years younger).

Example for 2025:

• Account balance on December 31, 2024: $800,000
• Account owner's age in 2025: 75
• IRS Uniform Lifetime Table factor at age 75: 24.6
• RMD: $800,000 ÷ 24.6 = $32,520

The distribution factor decreases each year, meaning a larger percentage of the account must be distributed as you age. This ensures accounts are substantially drawn down over a normal lifetime.

Still Working at 73? The Still-Working Exception

Workers who are still employed at age 73 and participate in their current employer's 401(k) can defer RMDs from that specific plan until April 1 of the year after they retire — but only if they do not own more than 5% of the business sponsoring the plan. This exception does not apply to IRAs, which require RMDs at 73 regardless of employment status.

Inherited IRA RMD Rules

The SECURE Act (2019) dramatically changed RMD rules for inherited IRAs. Most non-spouse beneficiaries must now empty the inherited account within 10 years of the original owner's death. There is no annual RMD requirement within those 10 years — but the entire account must be distributed by the end of year 10.

Exceptions apply to "eligible designated beneficiaries" who can still use the old stretch IRA rules:

• Surviving spouses (who can roll over the inherited IRA as their own)
• Disabled or chronically ill individuals
• Beneficiaries no more than 10 years younger than the original owner
• Minor children of the original owner (until age of majority, then the 10-year clock starts)

Strategies to Manage RMD Tax Impact

The Qualified Charitable Distribution (QCD) is particularly powerful for retirees who give to charity and who have their Social Security benefits taxed. By directing the RMD to charity rather than taking it as income, they reduce adjusted gross income, which can keep Social Security benefits in a lower tax tier and reduce Medicare IRMAA premium surcharges.

This article is for informational purposes only and does not constitute financial advice.