RMDs, Start to Finish

Taxes in Retirement

I've called RMDs a "freight train" so many times in these letters that they deserve their own. Here's the whole thing, start to finish, so you never have to piece it together from five different sources.

What they are

Required Minimum Distributions are the IRS collecting on the deal it made with you decades ago. You deducted your contributions going in. The tax was deferred, not forgiven. RMDs are the point where deferral ends and the IRS makes you start withdrawing, and paying tax, whether you need the money or not.

They apply to Traditional IRAs, SEP and SIMPLE IRAs, 401ks, 403bs, 457s, and most other pre-tax accounts.

They do NOT apply to Roth IRAs during your lifetime. And as of 2024, they no longer apply to Roth 401ks either. Roth money is yours to leave alone.

When they start

Your birth year sets the age:

Born 1951 through 1959: RMDs start at 73. Born 1960 or later: RMDs start at 75. (Born 1950 or earlier: you're already taking them.)

That two-year difference is bigger than it looks. Two extra years of deferral for the 1960+ crowd, but also two more years of compounding into a bigger balance and a bigger eventual RMD.

The first-year trap

You have until April 1 of the year AFTER you reach RMD age to take your first one. Sounds like a gift.

It's a trap for the unwary. If you delay that first RMD into the following year, you'll owe TWO in that year: the delayed first one by April 1, and the regular second one by December 31. Two RMDs stacked in one tax year can shove you into a higher bracket, fire the tax torpedo, and set an IRMAA surcharge two years later.

Almost everyone should take the first RMD in the year they reach the age and skip the April 1 "grace period" entirely.

The math

Each year: take your account balance as of December 31 of the PRIOR year and divide by a life-expectancy factor from the IRS Uniform Lifetime Table.

At 73, the factor is 26.5. At 75, it's 24.6. At 80, 20.2. At 85, 16.0. At 90, 12.2.

So a $1,000,000 IRA at 73 requires a withdrawal of about $37,700 (1,000,000 divided by 26.5). At 80, the same balance requires about $49,500. The divisor shrinks every year, so the required PERCENTAGE rises even if the balance holds steady. That's why RMDs feel gentle at first and aggressive later.

(One wrinkle: if your spouse is more than ten years younger and your sole beneficiary, you use a different table with larger factors and smaller RMDs.)

Aggregation: which accounts, which rules

IRAs: calculate the RMD for each one, but you can take the total from any single IRA or any combination. One withdrawal from one account can satisfy the RMDs for all your IRAs.

401ks and other employer plans: each one has its own RMD that must come from THAT plan. No aggregation. Three old 401ks means three separate withdrawals.

Still working at 73? If you're still employed and don't own more than 5% of the company, your CURRENT employer's 401k is exempt until you retire. Your IRAs and old 401ks are not.

The penalty

Miss an RMD (or take too little) and the penalty is 25% of the amount you failed to withdraw. Fix it within two years and it drops to 10%. It used to be 50%, so this is progress, but it's still one of the harshest penalties in the code for a mistake that's usually just forgetting.

The custodian will often calculate your RMD for you. They will not take it for you unless you set that up. Automate it: most custodians let you schedule the RMD as a monthly or annual auto-distribution with taxes withheld. Set it once and the 25% risk goes away.

Managing the freight train

Everything in the Golden Window letter is really about shrinking the RMD before it starts. But once you're in it:

Take the first one in the RMD year, not by April 1. Use qualified charitable distributions to satisfy RMDs without adding to income if you give anyway (a full letter on that is coming). Withhold taxes from the RMD itself to skip estimated payments; you can even take one December RMD with heavy withholding to cover the whole year's tax bill. Reinvest what you don't spend in the taxable brokerage account. An RMD is a required withdrawal, not required spending.

The freight train can't be stopped. It can be scheduled, sized, and steered.