Required Minimum Distributions (RMDs)

Definition

A Required Minimum Distribution (RMD) is the minimum amount the IRS requires you to withdraw from a pre-tax retirement account — a Traditional IRA, a traditional 401(k), 403(b), 457(b), SEP or SIMPLE IRA — every year once you reach the RMD age. Under current law that age is 73, and it is scheduled to rise to 75 for people born in 1960 or later. Congress has moved this age several times in recent years (it was 70½, then 72, now 73), so treat any specific age as current law and subject to change, not a permanent fixture.

The logic is simple: those accounts hold money that has never been taxed, and RMDs are how the government finally starts collecting. Each RMD is taxed as ordinary income in the year you take it — the same rates as a paycheck — regardless of whether the money inside came from dividends, interest, or capital gains.

Two important carve-outs. First, Roth IRAs have no lifetime RMDs for the original owner — the tax was paid on the way in, so the IRS has no deferred bill to collect. That asymmetry is one of the biggest practical differences covered in Roth vs Traditional IRA. Second, an RMD is a floor, not a ceiling — you can always withdraw more; you just cannot withdraw less.

Missing an RMD (or taking too little) triggers a steep excise tax on the amount you failed to withdraw — recently on the order of 25%, reducible if corrected promptly. The exact percentages have changed before and can change again, so verify current figures with the IRS.

Why It Matters

For most of your investing life, taxes on a Traditional IRA are a problem for "future you." RMDs are the year future you arrives. Three consequences matter most.

RMDs stack on top of everything else you earn. The withdrawal is added to Social Security, pensions, and taxable-account dividends when your tax is calculated. A large pre-tax balance can generate an RMD big enough to push you into a higher marginal bracket, increase the taxable share of Social Security benefits, or trigger income-based Medicare premium surcharges — a tax problem that arrives on a schedule you do not control.

This is exactly why people convert before RMD age. The years between retirement and the RMD age are often the lowest-income window of an investor's adult life. Converting slices of a Traditional IRA to a Roth during that window — paying tax at today's low bracket to shrink the future forced withdrawals — is the core idea behind the Roth conversion ladder. Every dollar converted is a dollar that will never appear in a future RMD calculation.

The percentage rises every year. The RMD is your prior year-end balance divided by an IRS life-expectancy factor, and the factor shrinks as you age. That means the *fraction* of the account you must withdraw climbs steadily: roughly 3.8% at 73, above 6% by 85, and over 8% by 90 (illustrative — see the table below). If the account keeps growing, the dollar amounts can grow even faster than the percentages. Retirees who never spend their RMDs still owe the tax, which is why RMD planning is really bracket management — a close cousin of the asset- location decisions in tax-efficient income investing.

Not tax advice: RMD ages, life-expectancy tables, penalty percentages, and QCD limits all change over time and depend on your situation. This article is educational. Confirm current rules with the IRS or a qualified tax professional before acting.

Example

The formula itself is one line:

RMD = prior December 31 account balance ÷ IRS life-expectancy factor

The factor comes from IRS life-expectancy tables (most account owners use the Uniform Lifetime Table). Suppose your Traditional IRA closed last year at $500,000 and you are 73 this year, with an illustrative factor of 26.5:

RMD at 73 = $500,000 ÷ 26.5 ≈ $18,868

That is about 3.77% of the account — the minimum you must
withdraw and report as ordinary income this year.

Here is how the same $500,000 balance would translate at different ages. All figures are illustrative — they use recent Uniform Lifetime Table factors, which the IRS updates periodically, and they hold the balance constant to isolate the effect of the shrinking factor:

Notice the shape: the required withdrawal roughly doubles as a percentage between 73 and

1. In real life your balance changes every year too — a strong market can push the dollar

RMD up even faster. The early percentages sit near the classic 4% rule withdrawal rate, which is why early RMDs often feel manageable while later ones force out more than a retiree would choose to spend.

RMDs for Income Investors

Here is the part that surprises many dividend investors: an RMD is a withdrawal requirement, not a sale requirement. The IRS cares that value leaves the pre-tax wrapper and gets taxed — it does not care what form that value takes. That opens two useful doors.

Door one: let the distributions pay the RMD. If your IRA holds income funds — a dividend grower like SCHD, a bond fund like BND, or a broad index fund like VOO — the cash those funds pay out inside the account can accumulate and be withdrawn as the RMD, without selling a single share. A $500,000 IRA yielding 4% throws off roughly $20,000 a year in distributions — in the same neighborhood as the early-age RMDs in the table above. Investors who build portfolios with steady, predictable payouts (see portfolio income stability) are effectively pre-funding their RMDs each year: turn off dividend reinvestment inside the IRA, let cash pool, and sweep it out on schedule. That sidesteps the risk of being forced to sell shares into a down market — the same danger described in sequence-of-returns risk.

Door two: take the RMD in shares. Most brokerages allow an in-kind transfer — moving shares directly from the IRA into a taxable brokerage account instead of withdrawing cash. The shares' market value on the day of the move counts toward the RMD, is taxed as ordinary income, and becomes the new cost basis in the taxable account. The holdings never stop working; they keep compounding in a different wrapper (where future dividends are taxed annually — see qualified dividends). In-kind transfers are useful when you do not want to be a seller — say, mid-drawdown. This is an educational description of the mechanics, not a recommendation.

Either way, remember the tax is identical: cash or shares, the RMD amount lands on your return as ordinary income. What the two doors change is whether you are forced to liquidate positions to satisfy it.

QCDs and Aggregation Rules

Qualified Charitable Distributions (QCDs) let an IRA owner (starting at age 70½ under current rules) send money directly from the IRA custodian to a qualified charity. Within an annual limit the IRS adjusts over time, a QCD counts toward the RMD but is excluded from taxable income entirely — often a better outcome than withdrawing the cash and separately deducting a donation, especially for retirees who take the standard deduction. Whether a QCD makes sense depends on your charitable intent and tax picture; this is a neutral description of the mechanism, not a suggestion to give.

Aggregation determines how many separate withdrawals you must actually make. If you own several IRAs, you calculate the RMD for each one but may aggregate them — taking the combined total from any one IRA (or any mix) you like. 401(k)s do not aggregate: each workplace plan generally must distribute its own RMD separately. These rules have exceptions and edge cases (inherited accounts, 403(b)s, and still-working exceptions all behave differently), so confirm how your specific accounts are treated before consolidating or skipping a withdrawal.

Common Mistakes

• Ignoring RMDs until the year they start. The size of your first RMD was determined by decades of contributions and growth. The cheapest fixes — Roth contributions, conversions in low-income years via a Roth conversion ladder, and smart asset location — all happen *before* age 73.
• Assuming you must sell holdings. An RMD is a withdrawal, not a liquidation. Cash distributions pooling inside the IRA, or an in-kind share transfer to a taxable account, can satisfy it while your positions stay intact.
• Taking the RMD from the wrong account type. IRAs can aggregate; workplace plans generally cannot. Taking your 401(k)'s RMD out of your IRA leaves the 401(k) requirement unmet — and exposed to the excise tax.
• Forgetting the RMD stacks on other income. A withdrawal that looks harmless in isolation can raise your bracket, the taxable share of Social Security, and Medicare premiums. Model the whole income stack, not the RMD alone — the same discipline behind withdrawal guardrails.
• Reinvesting the RMD and assuming the tax disappeared. You can absolutely reinvest an unneeded RMD in a taxable account — but the withdrawal is taxed either way. Reinvesting changes where the money sits, not what you owe.
• Confusing Roth 401(k)s with Roth IRAs. Roth IRAs have no lifetime RMDs. Workplace Roth accounts historically did (recent law changes have aligned them, but the details are year-specific) — check current rules rather than assuming "Roth" always means "no RMD."

FAQ

What age do RMDs start?

Under current law, RMDs begin at age 73, and the starting age is scheduled to rise to 75 for people born in 1960 or later. The age has changed repeatedly (70½ → 72 → 73), so always confirm the rule in effect for your birth year. There is also a one-time quirk: your first RMD can generally be delayed until April 1 of the following year, but doing so means taking two RMDs in that year — which can inflate that year's taxable income.

Do Roth IRAs have RMDs?

No — Roth IRAs have no RMDs during the original owner's lifetime. The money went in after-tax, so the IRS has nothing deferred to collect. This makes the Roth the natural home for assets you want to keep compounding untouched into your 80s and 90s, and it is a major reason investors convert pre-tax balances to Roth before RMD age. Beneficiaries who inherit a Roth do face distribution rules, however. See Roth vs Traditional IRA for the full comparison.

Can I take my RMD in shares instead of cash?

Usually, yes. An in-kind distribution moves shares directly from the IRA to a taxable brokerage account, and their market value on the transfer date counts toward the RMD. You owe ordinary income tax on that value exactly as if you had withdrawn cash, and it becomes your new cost basis going forward. It satisfies the RMD without selling holdings you want to keep. Availability and paperwork vary by brokerage, so ask yours how in-kind RMDs are handled.

How is the RMD amount calculated?

Divide your account's prior December 31 balance by the IRS life-expectancy factor for your age — RMD = prior Dec 31 balance ÷ factor. Most owners use the Uniform Lifetime Table; a different table applies if your sole beneficiary is a spouse more than ten years younger. Because the factor shrinks each year, the required percentage rises with age — from roughly 3.8% at 73 to over 8% by 90 (illustrative figures; the IRS updates the tables periodically). Custodians typically calculate the number for you, but you are responsible for taking it.

What happens if I miss an RMD?

You owe an excise tax on the shortfall — the amount you should have withdrawn but did not. In recent years the penalty has been on the order of 25% of the missed amount, reduced to around 10% if corrected within a defined window, and the IRS can waive it for reasonable errors if you file the appropriate form and fix the shortfall. The exact percentages and procedures have changed before and may change again — verify the current rules.

Can dividends inside my IRA cover the RMD?

Often, yes — and this is a natural fit for income portfolios. If you switch dividend reinvestment off inside the IRA, the cash paid by your funds accumulates through the year and can be withdrawn as the RMD without selling shares. A portfolio yielding around 4% roughly covers the early-age RMD percentages on its own; at older ages, the required percentage eventually outgrows most portfolios' yields, and you may need to distribute shares in-kind or sell. Building payout streams steady enough to plan around is covered in portfolio income stability.