Required Minimum Distributions: How RMDs Work and How to Plan Around Them

If most of your retirement savings sit in a traditional IRA or 401(k), the IRS eventually wants its share. Required minimum distributions, or RMDs, are the yearly withdrawals the government requires once you reach a certain age. Plenty of retirees in League City, Clear Lake, and Friendswood are surprised by how large these can be and by how much they can lift taxable income.

This post explains how RMDs work and the planning tools people commonly discuss. It's educational, not a recommendation. Review any plan with your CPA or financial advisor before you act.

What an RMD Is

Money in traditional IRAs and most employer plans usually has never been taxed. Rather than letting it grow tax-deferred forever, the IRS requires you to start withdrawing a minimum amount each year and to pay ordinary income tax on it. You can always take more than the minimum, but you can't take less.

When RMDs Start

• Born 1951 to 1959: RMDs generally begin at age 73.
• Born 1960 or later: RMDs generally begin at age 75.

Your first RMD can be delayed until April 1 of the year after you reach your starting age, but then you'd take two in the same year, which can mean a much larger tax bill. The rules have changed several times in recent years, so confirm your own starting age with your CPA or plan provider.

How the Amount Is Figured

Your RMD is your account balance as of December 31 of the prior year, divided by a life expectancy factor from an IRS table. The factor gets smaller as you age, so the percentage you must withdraw rises over time. If you have several IRAs, you can add up the RMDs and take the total from any of them. Employer plans like 401(k)s are generally calculated and taken separately.

What Happens If You Miss One

The IRS can charge an excise tax of 25% of the amount you should have taken. It may drop to 10% if you correct the mistake promptly. You'd still owe regular income tax on the distribution. Most custodians will calculate your RMD for you, but the responsibility to take it is yours.

Ways People Plan Around RMDs

• Roth conversions before RMDs begin. Moving money from a traditional IRA to a Roth IRA means paying tax on the converted amount now, often in the lower-income years between retirement and RMD age. Roth IRAs have no RMDs for the original owner. Conversions are taxable and generally can't be undone, so model them with your CPA first. Our post on the three tax buckets of retirement shows how this fits into a bigger picture.
• Qualified charitable distributions (QCDs). If you're 70½ or older and give to charity, you can send money directly from an IRA to the charity, up to an annual limit. A QCD can count toward your RMD and isn't included in your taxable income.
• Delaying RMDs on a current employer plan. If you're still working, your current employer's 401(k) may let you delay RMDs from that plan (with exceptions for 5% owners). This does not apply to IRAs.
• Using a QLAC. A qualified longevity annuity contract can be bought with a limited portion of IRA money. It may reduce the balance used to calculate RMDs, with income starting later in life. Dollar limits and rules apply. See how annuities create guaranteed lifetime income for the basics.

Why RMDs Affect More Than Your Tax Bill

An RMD adds to your income for the year. That can increase the taxable portion of your Social Security benefits, push you into a higher bracket, and raise your Medicare Part B and Part D premiums, which are based on income from two years earlier. Texas has no state income tax, but federal tax still applies, and these ripple effects catch many retirees off guard.

Start Planning Before Age 70

The best planning window is usually the years before RMDs begin, while you still have flexibility. I'm based in League City and work with pre-retirees and retirees across Clear Lake, Friendswood, and Webster. If most of your savings are tax-deferred, I'm happy to walk through how RMDs could look for you and where other tools might fit. Tax decisions are worth confirming with your CPA or financial advisor.

Frequently Asked Questions

What age do RMDs start?

For most people born between 1951 and 1959, RMDs generally start at age 73. For those born in 1960 or later, they generally start at 75. Confirm your own starting age with your CPA or plan provider, since the rules have changed several times.

Do Roth IRAs have RMDs?

Original owners of Roth IRAs are not required to take RMDs during their lifetime. Inherited Roth IRAs have their own distribution rules.

What happens if I miss an RMD?

The IRS can charge an excise tax on the amount you should have withdrawn, generally 25%, which may be reduced to 10% if corrected promptly. You would also owe regular income tax on the distribution. Talk to your CPA right away if you think you missed one.

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