Required Minimum Distributions (RMDs) Explained — Avoid the 25% Penalty

Meta Description: RMDs start at age 73 under SECURE 2.0. Learn how required minimum distributions are calculated, which accounts are affected, how to avoid the 25% penalty, and smart strategies to minimize taxes.

Tags: RMDs, required minimum distributions, SECURE 2.0, retirement taxes, IRA withdrawals, retirement planning

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The IRS has been patient while your retirement savings grew tax-deferred for decades. At some point, they want their cut — and that's exactly what Required Minimum Distributions (RMDs) are designed to enforce. Miss the deadline, and you're looking at a steep penalty on money you were supposed to withdraw. Understanding RMDs isn't optional — it's one of the most important mechanics of late-stage retirement planning.

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⚠️ Disclaimer: This article is for informational and educational purposes only and does not constitute tax or financial advice. RMD rules are complex, subject to legislative change, and interact with your overall tax situation in ways unique to your circumstances. Consult a qualified tax advisor or CPA before making any RMD-related decisions.

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What Are RMDs and Why Do They Exist?

A Required Minimum Distribution is a mandatory annual withdrawal from certain tax-advantaged retirement accounts. The IRS requires these withdrawals because those accounts — traditional IRAs, 401(k)s, 403(b)s, SEP IRAs, and SIMPLE IRAs — were funded with pre-tax dollars. Tax deferral was never intended to be permanent. RMDs ensure the government eventually collects taxes on that income.

The rules are enforced with teeth: fail to take your full RMD, and you owe a penalty on the shortfall.

When Do RMDs Start? SECURE 2.0 Changed the Age

Under the original SECURE Act (2019), the RMD starting age moved from 70½ to 72. Then the SECURE 2.0 Act (2022) pushed it further: RMDs now begin at age 73 for anyone who turns 73 on or after January 1, 2023.

There's a one-time option to delay your very first RMD until April 1 of the year following the year you turn 73. However, doing so means you'll take two RMDs in that second year — which can push you into a higher tax bracket. For most retirees, it's cleaner to take the first RMD in the year you actually turn 73.

Important: SECURE 2.0 also set the starting age at 75 beginning in 2033 for those born in 1960 or later. If you're still a few years away from 73, this update could apply to you — check your birth year against current law.

Which Accounts Require RMDs?

RMDs apply to:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k), 403(b), and 457(b) plans (employer-sponsored)
• Inherited IRAs (including Roth IRAs inherited from someone other than a spouse, under current rules)

Roth IRAs do NOT have RMDs during the owner's lifetime. This is one of the most powerful features of Roth accounts. Your Roth IRA can continue growing tax-free indefinitely — you are never forced to withdraw from it while you're alive. This makes Roth conversions before age 73 a valuable tax planning tool.

If you're still working past age 73 and participate in your current employer's 401(k), you may be able to delay RMDs from that specific plan until you retire — check with your plan administrator.

How Is Your RMD Calculated?

Your RMD is determined each year using two figures:

1. Your account balance as of December 31 of the prior year
2. Your life expectancy factor from the IRS Uniform Lifetime Table

The formula: RMD = Prior Year-End Balance ÷ Life Expectancy Factor

For example, a 75-year-old with a $500,000 IRA balance uses a life expectancy factor of 24.6 (from the IRS Uniform Lifetime Table). Their RMD would be:

$500,000 ÷ 24.6 = $20,325

The life expectancy factor decreases each year as you age, which means your RMD as a percentage of your account grows over time. By age 85, the same math would require a larger percentage withdrawal from whatever balance remains.

Each IRA custodian typically calculates and notifies you of your RMD amount annually — but the legal obligation to take it is entirely yours.

The Penalty for Missing an RMD

This is where attention is non-negotiable. If you fail to take your full RMD by the deadline (December 31 of each year, except your first which can be delayed to April 1), the penalty is 25% of the amount you failed to withdraw.

Under SECURE 2.0, this was reduced from the prior 50% penalty — still steep, but with a correction window. If you catch the missed RMD and correct it within two years, the penalty is further reduced to 10%.

Example: If your RMD is $20,000 and you fail to take it, you owe a $5,000 penalty (25%). If you self-correct promptly, that drops to $2,000 (10%). Either way, you still owe income tax on the RMD itself when it's taken.

Avoiding this penalty entirely is straightforward: know your RMD amount, calendar the deadline, and don't leave it until December 31 when account processing delays can cause problems.

Strategies to Minimize RMD Tax Impact

RMDs are taxed as ordinary income. For retirees with substantial tax-deferred balances, large RMDs can push you into higher brackets, trigger Medicare IRMAA surcharges, increase taxation of Social Security benefits, and reduce eligibility for certain deductions.

Smart planning ahead of age 73 can dramatically reduce the RMD burden:

1. Roth Conversions Before Age 73 Converting traditional IRA balances to Roth in the years before RMDs begin reduces the pre-tax account balance that will be subject to mandatory withdrawals. You pay taxes on conversions at today's rates — ideally in lower-bracket years before Social Security and RMDs stack up.

2. Qualified Charitable Distributions (QCDs) If you're charitably inclined and over age 70½, a QCD allows you to direct up to $105,000 per year (2024 limit, indexed for inflation) from your IRA directly to a qualified charity. The distribution counts toward your RMD but is excluded from your taxable income — a powerful combination for donors.

3. Work Backward from Your Tax Bracket In years before RMDs begin, model your projected income at age 73, 75, and 80. If large RMDs will push you into the 24% or 32% bracket, voluntary withdrawals or conversions at the 22% bracket today may be worth it.

4. Don't Over-Concentrate in Tax-Deferred Accounts For investors still accumulating, this is the lesson: balance between tax-deferred (traditional), tax-free (Roth), and taxable accounts to preserve flexibility later.

Value Investing Inside Your IRA

The holdings inside your IRA matter. A value-focused investor who holds dividend-paying, fundamentally sound companies inside a traditional IRA benefits from tax-deferred compounding — but needs to be aware that all withdrawals, including RMDs, are taxed as ordinary income regardless of what generated the gains.

Growth inside a Roth IRA, by contrast, is fully tax-free — making it the ideal location for your highest-growth, highest-conviction positions.

Use our Value Stock Screener at valueofstock.com/screener to identify undervalued companies worth holding in your tax-advantaged accounts — and think carefully about which account type is the right home for each position.

RMDs and the Bigger Picture

RMDs are not just a tax obligation — they're a signal to revisit your overall retirement income plan. When your required withdrawals are larger than your spending needs, you have flexibility: reinvest the excess in taxable accounts, make Roth contributions if eligible (earned income required), or fund charitable giving. When RMDs fall short of your spending, they need to be supplemented with portfolio withdrawals or other income.

The retiree who understands RMDs well treats them as one planned income stream among several — not a surprise tax bill that arrives every December.

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✅ Actionable Takeaways

• RMDs begin at age 73 under SECURE 2.0 (changing to 75 in 2033 for those born in 1960 or later).
• Penalty for missing an RMD is 25% of the amount not taken — reduced to 10% if corrected quickly. Don't miss it.
• Roth IRAs have no RMDs during the owner's lifetime — a powerful reason to prioritize Roth conversions before age 73.
• RMDs are calculated using the IRS Uniform Lifetime Table — your custodian will tell you the number, but the legal obligation is yours.
• Qualified Charitable Distributions (QCDs) let you satisfy your RMD while excluding the amount from taxable income — ideal if you donate anyway.

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This article is for educational purposes only and does not constitute tax or financial advice. RMD rules are subject to legislative change. Consult a qualified CPA or financial advisor for guidance specific to your situation.

— Harper Banks, financial writer covering value investing and personal finance.