Required Minimum Distributions: Ages, Tables and the 25% Penalty

Defer tax for decades and the IRS eventually sets the withdrawal schedule. Traditional IRAs, 401(k)s and similar accounts all carry required minimum distributions, which are taxable withdrawals you must take every year once you reach an age written into federal law, in amounts sized by a life-expectancy table the IRS publishes and updates from time to time.

When they start

SECURE 2.0 put the starting age at 73. Born in 1960 or later? Yours is 75. The definition of a required minimum distribution covers the history and edge cases.

The first one can wait until April 1 of the following year. Every later one is due by December 31. Delay the first and two land in one tax year. For most people that’s a poor trade, since the second distribution stacks on top of the first, the pension and Social Security in a single return, and a year of doubled withdrawals is exactly the kind of year that crosses a bracket line or a Medicare threshold.

How the amount is set

Take last December 31’s balance. Find the factor for the age you reach this year in the Uniform Lifetime Table, printed in IRS Publication 590-B. Divide.

The factor shrinks every year. The share you must take grows. In that example it’s about 4%, and it climbs through your eighties and nineties. Married to someone more than ten years younger who is your sole beneficiary? A different table applies, with larger factors and smaller RMDs.

Several IRAs? Work out each RMD, add them, and take the total from any mix of the accounts. A 401(k)’s RMD must come from that 401(k).

The trap

Big balances make big RMDs. Need doesn’t enter into it.

Take a retiree who lived off savings and a pension, let the IRA compound untouched through their sixties, and reached 75 with a balance that now forces out a five-figure withdrawal every year, taxed as ordinary income on top of Social Security and the pension. That withdrawal can lift them into a higher bracket. It can drag them into the Social Security tax torpedo. It can also carry income over a Medicare threshold, and the premium goes up two years later.

Once RMDs start, none of this is optional, so the planning has to happen before.

The levers are all about the balance. Every dollar you withdraw or convert to a Roth in your sixties is a dollar that will not sit in the account on some future December 31, so it never gets divided by a factor and forced out on the IRS schedule, and you get to choose the year it is taxed, which usually means a year when your other income is low. Charity offers one more lever after 70½.

The qualified charitable distribution

From age 70½, you can send money straight from an IRA to a qualifying charity. The IRS calls this a qualified charitable distribution, or QCD. It counts toward the year’s RMD. It never enters adjusted gross income.

That beats withdrawing and donating. Donated cash only helps if you itemize, and even then the withdrawal has already raised your adjusted gross income, while a QCD keeps the money off the return from the start and so keeps it out of provisional income and out of the Medicare premium test as well.

The penalty and the still-working exception

Miss an RMD, or take too little, and the IRS charges an excise tax of 25% of the shortfall. Correct it within the IRS window and the rate drops to 10%. Form 5329 reports it. The same form lets you ask for a waiver when the miss was a reasonable error already fixed.

Still working? If you are employed past RMD age and own no more than 5% of the company, you can usually delay RMDs from that employer’s plan until you retire. Only that plan. IRAs and old 401(k)s still owe theirs.

What to take from this

Know your start year. Estimate the first RMD now with the retirement withdrawal calculator. A large number next to your other income is a signal to act in the years before RMDs begin. Situations differ.

Medicare premiums are the part of the trap people see last, because the bill arrives two years after the income, and the next lesson on Medicare IRMAA surcharges explains the lag and the cliff.