Are Required Minimum Distributions (RMDs) Taxable? Avoid this Mistake + FAQs

Required Minimum Distributions (RMDs) are taxable under federal law if they come from tax-deferred retirement accounts like Traditional IRAs, 401(k)s, 403(b)s, or SEP IRAs.

Many retirees are caught off guard by the tax bill on their RMDs. In one survey, 68% of retirees withdrew only their RMDs each year, yet over half confessed that understanding the tax rules is complex.

If you’ve saved diligently in tax-deferred accounts, you might be wondering how those forced withdrawals will impact your tax return. Let’s dive in with an expert lens and clear up the confusion.

• Why the IRS taxes RMDs and how these rules came to be – Understand the purpose behind RMDs and the role of tax deferral.

• Federal vs. state taxation of RMDs – Learn how RMDs are taxed by Uncle Sam and why some states might give you a break (or not).

• RMDs from Traditional vs. Roth accounts – Find out which RMDs are taxable income and which can be tax-free, including inherited accounts and new law changes.

• Strategies to reduce or avoid taxes on RMDs – Discover smart moves like QCDs and Roth conversions, plus pros and cons of each approach.

• Common mistakes and advanced tips – Avoid costly errors with RMDs (like missed deadlines or wrong accounts) and grasp nuanced cases like inherited IRAs, the SECURE Act 2.0 changes, and qualified charitable distributions.

What Are RMDs and Why Are They Taxed? 💸

Imagine having a retirement account that grew tax-free for decades. RMDs are the government’s way of ensuring you eventually pay taxes on that money.

A Required Minimum Distribution (RMD) is the minimum amount you must withdraw from certain retirement accounts each year once you reach a specified age. The IRS introduced RMD rules so that tax-deferred retirement savings (which enjoyed years of tax deferral) don’t escape taxation forever.

The IRS and Tax-Deferred Accounts: When you put money into a Traditional IRA or 401(k), you typically didn’t pay taxes on that income up front. It grew tax-deferred. The trade-off is that, later in life, the IRS demands its share through RMDs. In essence, RMDs force you to take income (which is then taxed) from accounts like Traditional IRAs, 401(k)s, 403(b)s, 457(b)s, SEP IRAs, and SIMPLE IRAs.

“Required” Means Mandatory: You cannot avoid taking these distributions once you hit the required age (we’ll discuss the exact age in a moment). If you try to keep the money in the account, you face steep penalties.

The policy ensures that eventually, as you draw down your retirement funds, that money is counted as taxable income. This prevents someone from deferring taxes indefinitely and then leaving the account as an inheritance to avoid taxes entirely (even inherited accounts have their own RMD rules).

Taxable Nature: RMDs from tax-deferred accounts are taxed as ordinary income at the federal level. There’s no special “RMD tax rate” or lower capital gains rate here – it’s just like receiving extra salary for the year. For example, if your RMD is $10,000, that $10,000 gets added on top of your other income (like Social Security or pension) and will be taxed according to your income tax bracket for that year. Because of this, RMDs can sometimes push you into a higher tax bracket or increase the portion of your Social Security benefits that become taxable.

Why the Government Cares: The whole point of accounts like Traditional IRAs and 401(k)s was to incentivize saving by delaying taxes. But eventually, the government wants to collect. RMD rules strike a balance between letting you benefit from deferral and making sure Uncle Sam isn’t left waiting forever. This is why RMDs are a cornerstone of retirement tax law.

Federal Taxation of RMDs: No Free Lunch on Deferred Taxes

When it comes to federal taxes, an RMD is fully taxable income (in most cases). Here’s a breakdown of how it works:

• Ordinary Income Tax: RMD withdrawals are taxed at your ordinary income tax rate, the same as wages, interest, or other income. There’s nothing inherently special about an RMD on your tax return – it will be included in your total adjusted gross income (AGI) for the year. You’ll get a Form 1099-R from your retirement plan or IRA custodian showing the distribution amount, which you report on your tax return.

• No Early Withdrawal Penalty: One piece of good news – because RMDs typically start in your early 70s (after the age when early withdrawal penalties apply), you won’t owe the 10% early withdrawal penalty on RMDs, even if you take your first RMD at age 73. (The early withdrawal penalty only applies to distributions before age 59½, and RMDs kick in long after that.)

• Withholding and Estimated Taxes: RMDs can have federal income tax withheld, just like a paycheck. You can usually elect to have, say, 10% or 20% withheld for taxes, which helps avoid a big tax bill in April. If you don’t withhold, be prepared to pay estimated taxes to cover the income, especially if the RMD is large relative to your other income. The RMD amount will increase your total tax due for the year unless you offset it with credits or deductions.

• Partial Taxation (After-Tax Contributions): Most people saved pre-tax money in their Traditional IRA/401(k), meaning all of it is taxable on withdrawal. However, if you made after-tax contributions to a retirement account (for example, nondeductible contributions to a Traditional IRA, documented on Form 8606, or after-tax contributions in a 401(k)), then part of each RMD is actually a return of those already-taxed dollars and won’t be taxed again. The IRS requires a pro-rata split: each distribution carries out a proportional amount of taxable and non-taxable funds. For instance, if 5% of your Traditional IRA contributions were after-tax, then 5% of each RMD is tax-free. It’s important to keep records of any after-tax “basis” in your IRAs to avoid overpaying tax. This is a nuance, but it means not all RMD income is taxable if you have some basis – though for most retirees, 100% of it is taxable because they took deductions on all contributions.

Key Definition – Ordinary Income: RMDs are taxed as ordinary income, which means they’re taxed at your marginal tax rate (the rate of your tax bracket for that top slice of income). This is different from long-term capital gains or qualified dividends, which have special lower tax rates. An RMD doesn’t get those preferential rates. It’s taxed like the money from a paycheck or interest from a bank account.

In summary, under federal law, if your RMD comes from a Traditional IRA or similar plan, assume it’s fully taxable unless you know you have some after-tax contributions in the mix. The federal perspective is straightforward: tax-deferred in, taxable out.

RMDs from Different Accounts: Traditional vs. Roth vs. Inherited

Not all RMDs are created equal. The tax treatment and even the requirement to take RMDs vary by account type. Let’s break down several common scenarios and account types:

Traditional IRAs, 401(k)s, 403(b)s and Other Tax-Deferred Accounts

For all tax-deferred retirement accounts – Traditional IRAs, 401(k)s, 403(b)s, 457(b) governmental plans, SEP IRAs, SIMPLE IRAs, and similar plans – RMDs work roughly the same way:

• You must take RMDs once you reach the required age (we’ll detail the age rules in the next section).

• Every dollar of an RMD is included in taxable income (except any portion attributable to after-tax contributions, as noted earlier).

• It doesn’t matter whether the account earned interest, dividends, or capital gains – inside a Traditional IRA/401k, all that growth was tax-deferred. When it comes out as part of an RMD, it’s taxed as ordinary income.

• If you have multiple Traditional IRAs, the IRS lets you aggregate the RMDs for those and take the total amount from any one (or more) of your IRAs in whatever split you want. For example, if you have two IRAs with a $5,000 RMD each, you could take $10,000 from one IRA and satisfy both. This flexibility applies among IRAs. Similarly, 403(b) accounts can be aggregated with each other. However, 401(k)s and other employer plans must each have their RMD taken separately from that specific account – you cannot satisfy a 401(k) RMD by taking money from an IRA, for instance.

• SEP and SIMPLE IRAs follow the same RMD rules as Traditional IRAs (they’re basically Traditional IRAs with special contribution rules). If you’re over RMD age and still contributing to a SEP or SIMPLE (perhaps due to still working), you still must take RMDs from those accounts.

In short, any retirement account that gave you a tax break up front will impose taxable RMDs later. The IRS wants taxes from those Traditional plans eventually, whether you need the money or not.

Roth IRAs and Roth 401(k)s: Are Those RMDs Taxable?

Roth IRAs (for the original owner) have no RMDs at all. This is a crucial difference. If you have a Roth IRA, you are not required to take any distributions during your lifetime. You could let a Roth IRA grow untouched well into your 70s, 80s, 90s with no mandatory withdrawals. This means no RMDs to report as income, and no tax due on the withdrawals you don’t take.

Why the special treatment? Roth IRA contributions are made with after-tax money (you already paid taxes on those contributions), and qualified withdrawals from a Roth IRA are tax-free. The IRS doesn’t force distributions from Roth IRAs because there’s no immediate tax revenue to collect (the tax was taken upfront). Additionally, Congress has thus far chosen to exempt Roth IRAs from RMDs to encourage retirement savings and because the tax benefit was “paid for” when you contributed.

RMDs and Roth 401(k)s: Historically, Roth accounts in employer plans (like a Roth 401(k) or Roth 403(b)) were subject to RMDs at the same required age as other accounts. This was always a bit odd, because those Roth withdrawals would typically be tax-free (assuming they’re qualified distributions). People often avoided that by rolling their Roth 401(k) money into a Roth IRA upon retirement to eliminate the RMD requirement. Very recently, legislation changed this: Starting in 2024, Roth employer accounts no longer have RMDs for the original owner. This was part of the SECURE Act 2.0 (passed in late 2022). So if you have a Roth 401(k), as of 2024 you will not be required to take RMDs from it either. Essentially, Roth 401(k)s now mirror Roth IRAs in having no lifetime RMD requirement for the owner.

Are distributions from Roth accounts ever taxable? For an original owner, qualified Roth distributions are tax-free. If you somehow had to take an RMD from a Roth 401(k) in the past (before 2024), that distribution was usually tax-free (assuming you met the rules for a qualified withdrawal – over 59½ and Roth account held 5+ years). Now with no RMD required, you won’t have any forced taxable event.

The only time Roth RMDs come into play is with inherited Roth IRAs or Roth 401(k)s. If you inherit a Roth IRA as a non-spouse, you do have to eventually take money out (by the end of 10 years in most cases, per current inherited IRA rules). Those inherited Roth withdrawals are generally tax-free to you, because the original owner already satisfied the tax requirements (again, as long as the Roth was held 5 years or more, any earnings withdrawn are tax-free; even if not, the earnings could be taxable, but beneficiaries typically can wait until the 5-year mark to withdraw earnings tax-free since there’s a 10-year window to distribute an inherited Roth IRA). We’ll cover inherited accounts more below. The main point: RMDs from Roth accounts are either not required (if you’re the original owner) or not taxable (if you’re a beneficiary taking them correctly).

Inherited Retirement Accounts and RMD Tax Implications

When you inherit a retirement account, special RMD rules apply. They’re complex, but here’s an overview with a focus on taxes:

• Inherited Traditional IRA or 401(k) (Non-Spouse Beneficiary): If you inherit a tax-deferred account from someone (and you’re not their spouse), current law (after the SECURE Act of 2019) generally requires that you fully distribute the account within 10 years of the original owner’s death. This is often called the “10-year rule.” You can take distributions in any pattern you want over those 10 years (a bit each year, or even wait and take it all at the end), but if the original owner had already begun their own RMDs, the IRS has clarified that you, as beneficiary, must continue taking annual RMDs each year 1 through 9 of the 10-year period, based on your life expectancy or the decedent’s, depending on circumstances. Then the account must be empty at the end of year 10. If the original owner died before their RMDs began (i.e., they were younger than RMD age), you can choose to not take anything until the 10th year, as long as the account is fully distributed by then. Each withdrawal you take from an inherited Traditional IRA or 401k is taxable to you as ordinary income (just like it would have been to the original owner). So yes, inherited IRA distributions are taxable, and they count as income in the year you take them. There is no tax deferral beyond 10 years for most beneficiaries. Example: If you inherited a $100,000 traditional IRA and take out $10,000 this year as part of an RMD schedule, that $10,000 is added to your income and taxed.

• Spousal Beneficiary: If you inherit your spouse’s IRA, you have more flexibility. A spouse can actually roll the IRA into their own and effectively treat it as if it was always theirs. In that case, it’s no longer an “inherited IRA” subject to the 10-year rule; instead, it becomes your own IRA and you’ll take RMDs when you reach your own RMD age (or not at all, if you move inherited Roth money into your own Roth IRA). Alternatively, a spouse beneficiary can remain as the beneficiary of the account. If the deceased spouse was already taking RMDs, the surviving spouse can continue those or delay until the deceased would have hit the required age. The rules are a bit technical, but tax-wise, if a spouse inherits and treats it as their own, distributions are taxed as the spouse’s own would be.

• Inherited Roth IRA: For non-spouse beneficiaries, Roth IRAs also fall under a 10-year rule (the account must be emptied by the end of 10 years after death). However, unlike a Traditional IRA, distributions from an inherited Roth IRA are typically not taxable to the beneficiary, because the money is coming from a Roth. There’s no requirement to take distributions each year (since the original owner had no RMD requirement at all), just the requirement to empty by 10 years. So a common strategy for an inherited Roth IRA is to leave it untouched for 10 years (letting it grow tax-free the whole time) and then withdraw it all at the end, tax-free. If the Roth IRA wasn’t at least 5 years old (counting from when the original owner first contributed), the earnings might be subject to tax for the beneficiary – but in many cases original owners have Roths longer than 5 years by the time of death.

• Inherited 401(k) or 403(b): Similar rules apply as inherited IRAs. Non-spouse beneficiaries generally must withdraw the account within 10 years. Those withdrawals are taxable if it’s a traditional account. A spouse beneficiary can often roll it over or treat it as their own in an IRA. Some employer plans might still have older “5-year rule” or other provisions if no designated beneficiary, but that’s getting into the weeds. The key takeaway: if you’re inheriting a retirement account, be prepared for taxable distributions if it’s not a Roth, and understand the timeline you’re on.

• Year of Death RMD: One often overlooked point – if you inherit an IRA and the original owner had an RMD due in the year they died that they didn’t take yet, the beneficiary is required to take that RMD by December 31 of the year of death. The income from that final RMD of the decedent will be taxable to the beneficiary who takes it (since they receive the distribution). This is a one-time thing to make sure the year-of-death required amount still gets taxed. Always check if the person died later in the year and hadn’t completed their RMD; if so, the heir must take it or face a penalty.

In summary, inherited accounts ensure that eventually all the tax-deferred money gets taxed, even if the original owner didn’t live long enough to withdraw it themselves. From a tax perspective, inheriting a traditional retirement account means you will report that money as income as you withdraw it. Inheriting a Roth means you likely won’t owe tax on withdrawals, but you still have to follow distribution rules.

SECURE Act 2.0 and Other Recent Changes: New Ages, New Rules

Retirement tax laws evolve. The past few years have seen significant changes to RMD rules thanks to major legislation like the SECURE Act of 2019 and SECURE Act 2.0 of 2022. Here are the key updates and what they mean for you:

RMD Age Increased (Again)

For many years, the starting age for RMDs was 70½ (that half year causing endless confusion). In 2019, the original SECURE Act raised the starting age to 72. Now SECURE Act 2.0 has increased the age further:

• Age 73 starting in 2023: If you had not reached age 72 by the end of 2022, your RMD age is pushed to 73. In practice, anyone born in 1951 or later reaches their RMD required age at 73. For example, if you turned 72 in 2023, you actually don’t have an RMD that year – your first RMD will be for the year you turn 73 (2024 in that example). You must take that first withdrawal by April 1 of the following year (2025 in this case), or by end of 2024 if you prefer not to double up.

• Age 75 starting in 2033: SECURE 2.0 sets another increase down the road. For those born in 1960 or later, RMDs will start at age 75. This means if you’ll reach 73 after the year 2032, you get to wait until 75 to begin RMDs. Congress extended the deferral window likely to reflect longer lifespans and to let people keep money in their accounts a bit longer.

What does this mean for you? It gives retirees more flexibility on when to start drawing down Traditional retirement accounts. If you don’t need the money, you can let it grow a couple more years. But note, when you delay, the required distributions will be slightly larger when they do begin (because you’re older – life expectancy is shorter, so the fraction of the account you must take is higher).

Also remember: these age changes do not affect inherited IRA rules – those are a separate framework. This is just for your own retirement accounts.

Required Beginning Date (RBD) and First RMD Timing

Your Required Beginning Date is a term to know: it’s the deadline for taking your very first RMD. Normally, it is April 1 of the year after the year you reach RMD age. So, if you turn 73 in 2025 (under current law), you have until April 1, 2026 to take the 2025 RMD. Every subsequent RMD must be taken by December 31 of that year.

Be careful: delaying that first RMD until April 1 means you’ll have to take two RMDs in the same calendar year (one by April 1 for the previous year, and one by Dec 31 for the current year). This can bunch income and potentially bump you into a higher tax bracket. Some people choose to take their first RMD in the calendar year they hit the age instead, to avoid doubling up. Others might deliberately take two in one year if, say, they retired and have very low income that next year, making it advantageous. It’s a planning consideration.

Reduced Penalties for Missing an RMD

For a long time, the penalty for forgetting to take an RMD (or not taking the full amount) was draconian: a 50% excise tax on the shortfall. For example, if you were supposed to take $10,000 and you took zero, you’d owe a $5,000 penalty to the IRS (on top of still having to withdraw the money and pay the regular tax when you eventually do).

SECURE Act 2.0 provided some relief here. Beginning in 2023, the penalty for a missed RMD dropped from 50% to 25%. Furthermore, if you catch the mistake and correct it in a timely manner (defined as generally by the end of the next year and by filing a specific tax form with explanation), the penalty is reduced to 10%. In many cases, the IRS can even waive the penalty entirely if you had reasonable cause and you fix the error. The key is to not ignore an RMD – if you realize you missed one, act quickly: take the distribution as soon as possible and inform the IRS via Form 5329 requesting a waiver. They often forgive it if it was an oversight and is now remedied.

The bottom line: it’s still costly to miss RMDs, but not as outright brutal as before. This change recognizes that retirees sometimes make mistakes, and a 50% penalty was exceedingly harsh. Now there’s more leniency, but don’t let that make you complacent. It’s best to adhere to the rules on time.

Roth 401(k) RMD Requirement Eliminated

We touched on this in the Roth section, but it’s worth highlighting under law changes. Prior to 2024, owners of Roth 401(k) accounts had to take RMDs from those accounts (even though the withdrawals would likely be tax-free, it was an administrative requirement). Many found that silly and would roll their Roth 401(k) into a Roth IRA upon retirement to avoid any RMDs.

SECURE Act 2.0 removed that requirement. Starting in 2024, employer plan Roth balances are no longer subject to RMD during the owner’s lifetime. If you were born in 1950 or earlier and already taking RMDs from a Roth 401(k) before 2024, you won’t have to anymore going forward. If you’re younger, you’ll never have to worry about it now. This change harmonized the rules so Roths, whether inside an IRA or a 401(k), are treated the same in terms of distribution requirements.

Practically, this means more freedom to leave Roth money untouched (and growing tax-free) as long as you live. Only your beneficiaries might have to deal with distribution rules after you’re gone.

Other Notable Changes

• Qualified Charitable Distributions (QCD) Adjustments: The QCD, which we will discuss in detail later, had a $100,000 annual limit for many years (and still does in 2023). SECURE 2.0 indexed this limit to inflation starting in 2024. That means it can slowly increase over time. Also, the law allowed a one-time QCD (up to $50k) to a split-interest entity like a charitable remainder trust or gift annuity. These are advanced charitable giving moves. The key takeaway is that the government is slightly expanding how QCDs can be used. But the fundamental benefit remains: using a QCD can satisfy your RMD without generating taxable income.

• Still Working Exception for RMDs: This isn’t new in SECURE 2.0, but since we’re reviewing rules: If you are still working at RMD age, some employer plans let you delay RMDs from that workplace plan until you retire (provided you don’t own more than 5% of the company). SECURE 2.0 did expand this to include those who might be working past the new ages. Remember, this exception does not apply to IRAs – even if you’re still working, Traditional IRA RMDs must start at the normal age.

• Higher Catch-Up Contributions (taxable vs Roth): Indirectly related to RMDs, changes like requiring higher-income individuals to make 401(k) catch-up contributions as Roth (after-tax) could mean some people will accumulate more Roth money (with no RMD) and slightly less pre-tax money (with RMD) than they otherwise would. This could impact your future RMDs (lowering them if more money ends up in Roth). It’s a tangential detail, but part of the evolving retirement landscape.

By staying current on these law changes, you can make better decisions about your retirement accounts – like timing of withdrawals, Roth conversions, or charitable moves – to optimize taxes. Now, let’s shift from the federal rules to how your state might handle that RMD income.

State Taxes on RMDs: The Hidden Twist 🗺️

Federal tax is only part of the story. Depending on where you live, your state might also tax your RMD – or it might not. State income tax laws on retirement income vary widely:

• No State Income Tax: If you live in a state with no personal income tax (examples: Florida, Texas, Nevada, Washington, South Dakota, Alaska, Wyoming), then you won’t owe any state tax on RMDs. Those states simply don’t tax income, period. RMDs would only face federal tax.

• States That Exempt Retirement Income: Several states have income taxes but specifically exclude some or all retirement account distributions from taxation, especially for seniors. For instance, states like Illinois and Mississippi do not tax distributions from 401(k)s, IRAs, or pensions. Pennsylvania generally exempts retirement plan withdrawals (including RMDs) for those who are retirement age. Iowa recently enacted a law to exclude retirement income from state tax starting in 2023 for those 55 and older. Each state has its own rules — some exempt all retirement income, some have caps (e.g., a state might say the first $20,000 of pension/IRA income is tax-free), and some phase in exemptions at certain ages.

• Partially Tax-Friendly States: States like New York, Georgia, South Carolina, and others often allow a certain deduction or exclusion for retirement income if you’re above a certain age. For example, New York allows up to $20,000 of qualified pension/IRA income to be exempt for those over 59½. Georgia has a large exclusion for retirement income for those over 65. These provisions mean only amounts above the exclusion are taxed by the state.

• Fully Taxable States: On the other hand, some states treat RMDs just like any other income and have no special breaks. For instance, California taxes IRA distributions fully as ordinary income (and California has no special exclusion for retirement income, though it doesn’t tax Social Security). New Jersey taxes traditional IRA distributions but with a twist: since NJ doesn’t allow a tax deduction for IRA contributions, a portion of each distribution is considered already-taxed and can be excluded (similar to the federal after-tax basis concept, but for NJ tax). This is highly state-specific.

• Municipal Taxes: A few localities have income taxes (e.g., some cities in Indiana, New York City, etc.). If you live in one, your RMD might also be subject to those local taxes.

Important: State tax laws change, and some have income thresholds or other complexities. Always check your current state’s tax treatment for retirement distributions. If you’re planning a move in retirement, it’s worth comparing states. The difference can be significant – for example, an $30,000 RMD would incur about $1,500 of state tax in a state with a 5% income tax, whereas it would be $0 in a state that exempts that income.

Also note that even in states that tax RMDs, Qualified Charitable Distributions (QCDs) (discussed below) are generally not counted as taxable income at the state level either, since they’re excluded from your federal AGI which most states start from.

In summary, from a state perspective: In most states with an income tax, expect your RMDs to be added to your state taxable income. But there are many exceptions and full exclusions out there. It’s a crucial part of retirement tax planning to know whether your state will take a bite of your RMD or not. The difference can influence where you choose to retire or whether you might prioritize strategies like Roth conversions (which could be taxed now at state level but save later) or QCDs.

Strategies to Reduce or Avoid Taxes on RMDs 💡

Facing a hefty tax on your RMDs isn’t inevitable. Smart planning can soften the blow or even eliminate taxation on some distributions. Here are some expert strategies and their implications:

Qualified Charitable Distributions (QCDs): The Tax-Free RMD Solution ❤️

A Qualified Charitable Distribution (QCD) is one of the most powerful ways to avoid taxes on your RMD. It allows you to transfer money directly from your IRA to a qualified charity, counting toward your RMD but not counting as income on your tax return.

Key points about QCDs:

• You must be age 70½ or older to do a QCD. This age threshold is interestingly lower than the RMD age (which is 73 now), meaning you can start QCDs even before RMDs are required. However, most people use QCDs once they’re in their RMD years.

• The maximum QCD is $100,000 per year per person (this limit will start indexing to inflation in 2024, so it may gradually increase). For most, that covers or exceeds the full RMD.

• The distribution must go directly from your IRA to the charity. If you withdraw it yourself and then donate, that doesn’t qualify – it would be a normal taxable withdrawal followed by a charitable donation (which may or may not give you a tax deduction).

• If done correctly, the QCD amount is excluded from your taxable income. It satisfies the RMD just as if you took it, but you owe $0 in taxes on that portion. It’s essentially a tax-free withdrawal because it went to charity.

• You cannot double dip: you don’t get to also claim a charitable deduction for the amount donated via QCD. But excluding it from income is usually better, especially for those who don’t itemize deductions.

• Example: John has a $10,000 RMD this year. He’s charitably inclined and decides to do a QCD of the full $10,000 to his favorite charity. The IRA custodian sends the money directly to the charity. John has now satisfied his RMD. When he files taxes, that $10,000 is not included in his income (it’s excluded as a QCD). He pays no tax on it. The charity gets the full $10,000 (and John gets the satisfaction of making a donation). If John is in the 24% tax bracket, this strategy saved him $2,400 in federal taxes he would have paid if he took the RMD himself. It also keeps his AGI lower, which can help avoid phase-outs or surcharges (like Medicare IRMAA or less Social Security being taxed).

• QCDs apply only to IRAs (including inherited IRAs). You generally cannot do a QCD directly from a 401(k). But if you’re eligible, you could roll funds from a 401k to an IRA and then do it. Also, the charity must be a 501(c)(3) public charity; donor-advised funds or private foundations are not eligible for QCDs.

If you are someone who gives to charity and also has RMD obligations, QCDs are a no-brainer to consider. They essentially let you donate from pretax dollars rather than after-tax dollars. It’s one of the few outright ways to avoid tax on otherwise taxable RMD income.

Roth Conversions: Pay Tax Now to Eliminate RMDs Later

Another strategic approach is the Roth conversion. This involves transferring (converting) money from your Traditional IRA or 401(k) into a Roth IRA. You pay income tax on the amount converted (since it’s essentially like a withdrawal), but then that money moves into the Roth and will grow tax-free going forward, with no RMDs for the rest of your life.

How this helps with RMDs:

• No future RMDs on converted funds: Once in the Roth IRA, that money won’t be subject to RMDs. So you’re effectively reducing the size of your Traditional IRA/401k, which in turn lowers your future RMDs (since those are calculated on the remaining balance of those accounts).

• Tax now vs. tax later: You will pay tax on a Roth conversion in the year of the conversion. The idea is to do conversions in years when your tax rate is manageable (or even low). For instance, some retirees have a gap between retirement and age 73 where their income might be lower (no salary, maybe not on Social Security yet, etc.). Those years can be golden opportunities to convert chunks of IRA to Roth at a lower tax bracket. Each converted chunk will reduce what’s left to be forced out as RMDs later.

• Example: Linda is 65 and recently retired. She has a large Traditional IRA. She expects that at 73, her RMDs combined with Social Security will push her into the 24% tax bracket. But right now, at 65, her income is low and she’s in the 12% bracket. Linda might convert part of her IRA to a Roth each year from 65 to 72, intentionally filling up maybe the 12% or 22% bracket. Yes, she’s paying some tax now, but it could prevent much larger forced RMDs (and taxes) later. By the time she’s 73, her IRA is smaller and RMDs are maybe half of what they would have been without conversions. Meanwhile, her Roth has grown and will produce tax-free withdrawals (with no requirement to withdraw).

• No converting RMDs themselves: Important rule – you cannot convert an actual RMD amount to Roth. In the year you have to take RMDs, you must withdraw the RMD first (and you can’t put that portion into a Roth). But you can still do conversions of additional amounts beyond the RMD in those years. Prior to RMD age, you can convert any amount you want (up to your whole account if you desire).

• Balance estate/beneficiary considerations: Converting to Roth not only helps you, but if leaving money to heirs, Roth money is more valuable (they inherit tax-free and still likely have to distribute in 10 years but won’t owe tax). Some people plan Roth conversions to essentially “pre-pay” the taxes at a known rate, rather than having their heirs pay later or be forced to withdraw under less ideal tax situations.

Roth conversions are a big topic and need careful planning – do too much and you could bump yourself into a high bracket or trigger Medicare premium surcharges. But done judiciously, it’s a top strategy to reduce the long-term tax cost of RMDs. Think of it as slowly moving money from the “taxable later” bucket to the “tax-free forever” bucket.

Still Working Past RMD Age? Leverage the RMD Work Exception

If you plan to work into your 70s, you might catch a break on RMDs for your current employer’s retirement plan. The IRS allows an exception for RMDs from an employer’s plan (like a 401(k)) if you are still working for that employer and you don’t own more than 5% of the company. Here’s how it works:

• Suppose you turn 73 but you’re still actively working for the company and participating in the company’s 401(k). If the plan allows (most do), you can delay RMDs from that particular 401(k) until April 1 of the year after you retire. Essentially, as long as you keep working there, you don’t have to take RMDs from that account.

• This only applies to the 401k of your current employer. Any IRAs you have, or 401k/403b from previous jobs, still require RMDs once you hit the age, regardless of your work status.

• Planning angle: If you are still working at 73+ and your employer’s plan has good investment options and low fees, you might consider rolling other IRA or 401k money into that current employer’s plan to postpone RMDs on those as well. Caution: not all plans accept roll-ins from IRAs, and some people prefer the flexibility of IRAs. But it’s a thought if deferring RMDs a bit longer is crucial for you.

• Once you retire, the RMDs from that plan will begin. You’ll take the first one by April 1 of the following year as usual.

This is a somewhat niche situation, but increasingly common as people work later in life. It doesn’t eliminate the tax, it just pushes it out a little further.

Strategic Withdrawals Before RMD Age (and Other Tactics)

You don’t have to wait for RMDs to start to begin drawing from your retirement accounts. In some cases, taking voluntary distributions in your 60s (or whenever you retire) can save you tax in the long run. This is sometimes called “fill-up the bracket” strategy:

• If you retire before RMD age and find yourself in a relatively low tax bracket (say 12%), you might choose to withdraw some IRA money (or convert to Roth) even if you don’t need it for spending. By doing so, you are using up your low tax bracket income with IRA withdrawals now, which means your IRA will be smaller later when RMDs hit. Essentially, you’re smoothing out your income and taxes over time instead of having a big spike at 73.

• Yes, you pay some tax now that you could have deferred, but if it’s at a low rate, it may beat paying a higher rate later on a larger balance.

• This strategy requires discipline (perhaps you take the withdrawn money and invest it in a regular brokerage account, or use it to delay Social Security and then get more SS later, etc.).

Another advanced strategy: QLAC (Qualified Longevity Annuity Contract). A QLAC is a specific type of deferred annuity you purchase within your Traditional IRA that starts paying out at an advanced age (up to age 85). The amount you use to buy a QLAC (up to $200,000 allowed now) is exempt from RMD calculations until those payments start. In essence, if you have a large IRA, you could move a portion into a QLAC at 73. That portion won’t count towards your RMDs in your 70s, thus reducing your required withdrawals (and taxes) in those years. You’ll get the money later as annuity payments (which will be taxable when received, but possibly at a time when other sources of income have diminished). QLACs are a way to push some RMD income further into the future and insure against longevity risk at the same time. They’re not for everyone, but it’s useful to know this option exists.

Finally, always coordinate RMD tax strategies with other aspects like Social Security timing, pension options, and estate plans. For example, if both spouses have IRAs, you might plan conversions in years one spouse is in a lower bracket, etc. The overall goal is to minimize lifetime taxes (yours and possibly your heirs’), not just the tax on one year’s RMD.

We’ve discussed several strategies individually. Next, let’s compare their pros and cons side by side for a clearer picture.

Pros and Cons of RMD Tax Mitigation Strategies

To weigh your options, here’s a comparison of two common RMD strategies – doing a QCD to charity vs. doing a Roth conversion – and how they stack up in benefits and drawbacks:

Both strategies above can be used in tandem too – they aren’t mutually exclusive. For example, you might plan to convert some IRA money to Roth over several years and still use QCDs for whatever RMDs you do have to take.

The right approach depends on your goals: if you’re charitably inclined, QCD is a direct win. If your goal is to preserve assets for heirs or for later use, Roth conversion is powerful. Some people will do neither and simply take RMDs and invest them in a taxable account – that’s okay too, especially if your RMD isn’t causing a big tax problem. The main thing is awareness of these options.

Now, let’s illustrate how all this plays out with a few realistic scenarios.

Real-Life Scenarios: How RMD Taxes Play Out 📊

Sometimes it helps to see the numbers. Below are three scenarios that show different aspects of RMD taxation and strategies, complete with outcomes:

Scenario 1: Traditional IRA RMD vs. Roth IRA (No RMD)

Situation: John is 73 and has a $500,000 Traditional IRA. His twin brother Jim (also 73) has a $500,000 Roth IRA. Both accounts have similar investments and values. John must take an RMD this year; Jim has none.

John’s RMD is determined by IRS tables. At 73, the distribution period (divisor) is about 26.5 years. So roughly 1/26.5 ≈ 3.8% of the account must be withdrawn. John’s RMD comes to about $19,000. Let’s assume John is in the 22% federal tax bracket. Jim, with the Roth, doesn’t have to take anything but for comparison, he can withdraw the same $19,000 if he wants (completely optional).

Outcome: John must add $19,000 to his taxable income for the year, increasing his tax bill. Jim has no such requirement and thus can leave his Roth untouched, owing nothing. Over time, John’s account will be drawn down by annual RMDs (and taxes each time), whereas Jim’s Roth could continue growing unmolested by taxes or forced withdrawals. This highlights how Roth accounts can provide tax relief in retirement compared to traditional tax-deferred accounts. Of course, Jim paid taxes upfront on that $500k (either as contributions or conversions), whereas John is paying them now, so eventually the IRS takes a cut one way or another.

Scenario 2: Using a QCD to Satisfy RMD – The Charitable Route

Situation: Linda is 75 and has a sizeable IRA. Her RMD for the year is $50,000. She does not need this money to live on, and she’s also charitably inclined, donating regularly to her favorite causes. Linda decides to use a Qualified Charitable Distribution to cover her RMD.

She arranges with her IRA custodian to send $50,000 directly to her chosen charity. This fulfills her entire RMD requirement for the year.

Let’s compare what happens with a QCD vs. without a QCD:

Outcome: By utilizing a QCD, Linda accomplishes her charitable giving and satisfies the RMD rule, all without inflating her taxable income. She avoids what would have been $12,000 in federal taxes. In addition, keeping that $50k off her AGI could help keep her Medicare Part B premiums lower (IRMAA surcharges kick in at certain income levels) and means less of her Social Security gets taxed. The charity benefits with a full $50k donation.

Had Linda taken the $50k personally, she’d have to pay tax and then donate – and even then, because of limits on charitable deductions (and the need to itemize), the tax outcome might not be as favorable. The QCD is clean and efficient. This scenario is a win-win for Linda and the charity (the only loser is the IRS, who gets no cut of that $50k).

Scenario 3: Inherited IRA – Taxable vs. Inherited Roth IRA – Tax-Free

Situation: Bob and Alice each inherited $200,000 from their father’s retirement accounts when he passed in 2021. Bob inherited a Traditional IRA, and Alice inherited a Roth IRA of equal value. Both siblings are in their 50s. Under the 10-year rule, they each need to withdraw the entire account by 2031 (10 years from the year after death). Their father was already taking RMDs, so to be safe, Bob decides to take out at least a small distribution each year to satisfy the annual RMD requirement, while Alice isn’t required to take annual distributions from the Roth (only the 10-year deadline).

Let’s assume Bob opts to withdraw the inherited Traditional IRA in equal installments over 10 years. That’s $20,000 per year. Alice decides to leave the Roth IRA untouched until the 10th year, when she will withdraw the full amount (which hopefully has grown, but for simplicity we’ll just compare on the original $200k).

Outcome: Bob will pay significant taxes on the money his father left him, effectively converting that IRA into after-tax cash over the decade. Alice’s inherited Roth provides her the full $200k (and any investment earnings on it) tax-free. Even though Alice had to take it out of the Roth IRA by year 10, she could simply transfer it to a regular brokerage account then; the key point is she never had to send a chunk to the IRS.

This illustrates how the type of account (Traditional vs Roth) makes a huge difference for beneficiaries. It also underlines why some people do estate planning with Roth conversions – to leave behind Roth assets that give heirs tax-free flexibility.

Bob’s case is still better than if the funds were left in a taxable account generating taxable interest every year, but it’s a reminder that “tax-deferred” doesn’t mean “tax-exempt.” Eventually, someone pays the tax – either the original owner via RMDs or the beneficiaries via inherited distribution rules.

These scenarios show in numbers what we’ve discussed conceptually: Traditional account RMDs create taxable income; QCDs can wipe out that taxable income if you give to charity; Roth accounts provide relief by eliminating tax on distributions altogether. Your personal situation will of course vary, but understanding these examples can help inform your strategy.

Common Mistakes to Avoid 🚩

RMD rules can be tricky, and many people slip up. Here are common mistakes with RMDs that you should avoid at all costs:

• Missing the Deadline: Forgetting to take your RMD by the deadline (December 31 each year, or April 1 for your first RMD if you delayed) is a costly error. Even though the penalty has been reduced, a 25% (or 10%) penalty is still significant. Mark your calendar or set reminders well in advance of year-end. If you have multiple accounts, ensure you satisfy each one’s RMD rules.

• Mixing Up Accounts: Remember that you can aggregate RMDs for IRAs (including SEP and SIMPLE IRAs) together, but you cannot use an IRA withdrawal to cover a 401(k)’s RMD and vice versa. Also, each employer plan (401k/403b/457) must have its own RMD taken from that plan (with an exception that multiple 403(b) accounts can be combined). A common mistake is thinking “I took enough total, so I’m fine” without taking from the right account. The IRS cares that each account’s requirement is satisfied appropriately.

• Assuming Roth IRAs Have RMDs: Some retirees, out of habit or misunderstanding, think they must take RMDs from their Roth IRA. They do not (if you’re the original owner). Don’t accidentally withdraw from a Roth IRA thinking you had to – you’re just reducing your tax-free compounding for no reason. (Roth 401(k)s now also have no RMDs as of 2024; before that, if you still had a Roth 401k at 73, you needed an RMD. But now the fix is easy – roll to a Roth IRA or rely on the new law).

• Trying to Roll Over or Convert an RMD: An RMD, once required, is not eligible to be rolled over into another tax-advantaged account. Some people mistakenly withdraw their RMD and then attempt to put it into a Roth IRA as a conversion or contribution. The IRS disallows that. You can certainly take out more than the RMD and convert that extra portion to Roth, but the RMD itself is locked in as a withdrawal. Also, if you had any plans to do a 60-day rollover with IRA distributions in an RMD year, remember that the RMD portion isn’t eligible for rollover.

• Not Planning for Taxes or Withholding: Taking a large distribution without withholding and forgetting about the tax bill is a mistake. If your RMD is big relative to your tax payments, consider having taxes withheld from the RMD (IRA custodians will do this if you ask, often defaulting to 10% but you can adjust). This can help you avoid underpayment penalties or a painful tax bill later. Alternatively, adjust your quarterly estimated tax payments to account for the RMD income.

• Neglecting Inherited RMD Rules: If you inherited an IRA, don’t assume you can just wait 10 years and ignore it in the meantime (especially if the original owner was already over RMD age). The rules are nuanced. Many beneficiaries didn’t realize the IRS expects annual distributions in years 1-9 if the original owner died after their RMDs began. Ignoring this could lead to penalties. Always review the rules or consult a professional when you inherit an account.

• First-Year Double RMD Shock: As mentioned, if you delay your first RMD to April 1 of the next year, you’ll have two RMDs taxable in that next year. A mistake is not realizing the tax impact of that. It’s not an error to take two in one year (that’s allowed), but not planning for that tax surge can hurt. Consider whether splitting the first RMD into the previous year might result in lower combined taxes.

• Failing to Utilize QCDs (if charitably inclined): It’s a mistake in the sense of missed opportunity – some people keep donating from their checkbook and also taking taxable RMDs, not realizing they could donate directly from their IRA and exclude that amount from income. If you give appreciable amounts to charity each year and you’re over 70½, don’t overlook the QCD option. It could save you a lot in taxes.

• Forgetting the 5-Year Rule for old 401(k) money in 403(b): This is a niche one, but if you have a 403(b) with pre-1987 contributions, those have some grandfathered RMD delay options until 75. Or if you left a Roth 401k in plan pre-2024, there were RMDs required. These are uncommon scenarios but can catch people off guard. Generally, consolidating old accounts into an IRA can simplify RMD tracking.

• Not seeking advice for complex situations: Complex situations (e.g., multiple beneficiaries, trusts as beneficiaries, charitable trusts, etc.) can dramatically alter how RMDs are handled. A common mistake is assuming standard rules when in fact a trust as beneficiary might require faster payout, or an “eligible designated beneficiary” like a minor child or disabled person can stretch distributions beyond 10 years. Failing to get guidance in these cases could lead to suboptimal outcomes or errors.

Avoiding these mistakes is crucial because RMD errors can be expensive. The rules might seem daunting, but with careful attention and perhaps automation (many custodians will calculate and even distribute your RMD automatically if you set it up), you can stay on track. When in doubt, consult a financial planner or tax advisor to ensure you’re meeting your obligations in the most tax-efficient way possible.

Key Terms You Must Know

• Required Minimum Distribution (RMD): The mandatory annual withdrawal that must be taken from certain retirement accounts once you reach a specified age (currently 73, gradually rising to 75 in coming years). It’s calculated based on the account balance and IRS life expectancy tables. RMDs ensure tax-deferred money eventually gets taxed.

• Tax-Deferred Account: A retirement account (Traditional IRA, 401(k), etc.) where contributions and earnings are not taxed in the year they occur, but will be taxed upon withdrawal. These accounts are subject to RMDs because eventually the deferred tax must be collected.

• Ordinary Income: A category of income taxed at regular rates (as opposed to capital gains rates). RMD withdrawals are taxed as ordinary income, which means they’re treated like wages or interest for tax purposes.

• Required Beginning Date (RBD): The deadline by which you must take your first RMD. Typically this is April 1 of the year after you reach RMD age. For example, if you turn 73 in 2025, your required beginning date is April 1, 2026 (for the 2025 distribution).

• SECURE Act: Major legislation affecting retirement accounts. The original SECURE Act of 2019 raised the RMD age from 70½ to 72. SECURE Act 2.0 (enacted 2022) further raised the age to 73 (and eventually 75), adjusted penalties, and made other changes to RMD rules.

• Roth IRA: A retirement account where contributions are after-tax, but qualified withdrawals are tax-free. Roth IRAs have no RMDs during the owner’s lifetime, making them a valuable vehicle for tax-free growth. Inherited Roth IRAs do have to be distributed within 10 years, but remain tax-free to the beneficiary in most cases.

• Roth 401(k): A Roth-style account in an employer plan. Historically had RMD requirements, but as of 2024, Roth 401(k)s no longer require RMDs for the original owner (aligning with Roth IRAs). Withdrawals, if qualified, are tax-free.

• Qualified Charitable Distribution (QCD): A direct transfer from an IRA (up to $100,000/year) to a qualifying charity, available starting at age 70½. QCDs count toward your RMD but are excluded from taxable income. Essentially a way to make your RMD (or part of it) tax-free by donating it.

• Ten-Year Rule: The post-2019 rule for most non-spouse beneficiaries of IRAs/401(k)s that the entire inherited account must be emptied by the end of the 10th year following the original owner’s death. For those inheriting from someone who was already taking RMDs, annual minimum distributions may be required during those 10 years as well.

• Eligible Designated Beneficiary (EDB): Certain beneficiaries who are exempt from the 10-year rule and can stretch inherited account distributions over their life expectancy. EDBs include surviving spouses, minor children of the decedent (until majority), disabled or chronically ill individuals, and individuals not more than 10 years younger than the decedent. They have more flexible (usually longer) RMD options for inherited accounts.

• Form 8606: An IRS form used to track non-deductible (after-tax) contributions to IRAs and to calculate the nontaxable portion of IRA distributions. If you have after-tax basis in your Traditional IRA, this form helps determine how much of your RMD is tax-free.

• Form 5329: The IRS form where you report certain retirement plan taxes, including the penalty for missed RMDs. If you miss an RMD, you file Form 5329 to calculate the penalty – or to request a waiver if you missed due to a reasonable error and have taken steps to fix it.

• Adjusted Gross Income (AGI): Your gross income minus certain adjustments (but not minus standard or itemized deductions). RMDs increase your AGI, which matters because many tax credits, deductions, and other taxes (like IRMAA for Medicare or taxation of Social Security) are based on your AGI or a modified version of it.

• Life Expectancy Factor: A number from IRS tables used to calculate RMDs. Each age has a corresponding factor (e.g., 25.6 for age 72, 24.7 for 73, etc. under current tables). The prior year-end balance of your account is divided by this factor to determine the RMD. The factor goes down as you age, meaning the percentage of your account you must withdraw goes up over time.

Knowing these terms will help you navigate conversations about RMDs with confidence. They often appear in IRS instructions, financial statements, and discussions with advisors.

FAQ 🙋: Frequently Asked Questions on RMD Taxes

Are RMDs considered earned income?

No. RMDs are not treated as earned income. They count as ordinary income for tax purposes, but they do not qualify as wages or salary. This means RMDs won’t allow you to contribute to an IRA and don’t incur payroll taxes.

Do Roth IRAs have required minimum distributions?

No. Roth IRAs do not have RMDs during the original owner’s lifetime. You can leave money in a Roth IRA as long as you live without any forced withdrawals. (Inherited Roth IRAs must be distributed within 10 years, but those withdrawals are typically tax-free.)

Are RMDs taxed as ordinary income?

Yes. RMDs are added to your taxable income and taxed at your normal income tax rates. They do not receive special tax treatment or lower rates, regardless of whether the money came from interest, dividends, or gains in the account.

Will my RMD make my Social Security benefits taxable?

Possibly, yes. RMD income increases your overall income, which can cause more of your Social Security benefits to become taxable. If your combined income exceeds IRS thresholds, up to 85% of your Social Security benefit can be taxed.

Can I avoid paying taxes on my RMD?

Yes, in certain cases. The most direct way is using a Qualified Charitable Distribution – the RMD amount given to charity is not taxed. Otherwise, once an RMD is due, you generally must pay taxes on it if you keep it.

Are RMDs taxed by states as well?

Yes, in most states. If your state has an income tax, it usually taxes RMDs as ordinary income. However, some states offer exemptions or exclusions for retirement income, and a few have no income tax at all, which would spare your RMD from state tax.

Can I roll over or convert my RMD to a Roth IRA?

No. An RMD amount cannot be rolled over or converted to a Roth. You must withdraw it and pay any taxes due. Only funds above the RMD (additional distributions) could be converted to a Roth IRA in that year.

Can I reinvest my RMD after I take it out?

Yes. Once you withdraw your RMD (and pay taxes on it), the money is yours to reinvest in a regular taxable account. You cannot put it back into an IRA or 401(k), but you can invest in stocks, bonds, mutual funds, etc., in a brokerage account.

Can I delay RMDs if I’m still working at 73+?

Yes, for a 401(k) at that job. If you’re still employed and don’t own over 5% of the company, you can delay RMDs from your current employer’s retirement plan until you retire. This exception doesn’t apply to Traditional IRAs – those require RMDs regardless of employment.

Are inherited IRA RMDs taxable to the beneficiary?

Yes. If you inherit a Traditional IRA or 401(k), any RMDs (or other withdrawals) you take are taxed as ordinary income to you. (Inherited Roth IRA distributions are generally tax-free, however, as long as the account was qualified.)

Is there a penalty for missing an RMD?

Yes. The IRS imposes an excise tax if you miss all or part of an RMD. Currently the penalty is 25% of the amount not taken (reduced to 10% if you correct it quickly). It’s important to take action and file for a waiver if you accidentally miss an RMD.

Can an RMD push me into a higher tax bracket?

Yes. RMD income is stacked on top of your other income, so it can potentially push some of your income into the next tax bracket. You’ll pay a higher rate on the portion that falls above the bracket threshold.