Understanding Required Minimum Distributions

As we enter the final quarter of 2025, it is a good idea to make sure you are up to date on taking the required minimum distributions (RMDs) from your retirement accounts for this tax year.

Once you’ve reached a certain age, or in the event that you’ve inherited an IRA, your required minimum distribution is the minimum amount you must withdraw from your retirement account each year.

You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or other retirement accounts by April 1 of the year after you turn 73. Future required distributions must be made prior to December 31 each year.

If you were born after 1960, then you won’t have to start taking RMDs from your retirement accounts until you turn age 75.

If you inherited an IRA from someone other than your spouse before 2020 or after the deceased owner had started their own RMDs, then RMDs are required each year for you as well.

The penalty for failing to take the required minimum distribution is 25% of the sum you should have withdrawn.

Your RMD is determined by taking the value of your retirement accounts as of December 31 of the previous year and dividing it by the distribution period that corresponds with your age from the life expectancy tables provided by the IRS.  If you have more than one IRA account, you can aggregate the balances, determine the RMD for each, and take the aggregate distribution from one account.

Required minimum distributions apply to all employer-sponsored retirement plans (401(k) plans, ROTH 401(k)s, 403(b) plans and 457(b) plans) as well as traditional IRA, SEPs and SIMPLE IRAs.

Two exceptions apply to the RMD rules. One, these distribution rules do not apply to ROTH IRAs. ROTH IRAs do not require withdrawals until after the death of the owner. The second exception is for an employee who continues to work past their starting age (currently 73 years old).  While the employee must make the mandatory withdrawals from his/ her IRAs, distributions from an employer-provided plan (i.e., 401(k)) can be delayed until April 1 of the year after retirement.  Employees who own more than 5 percent of the company cannot use this delay in distributions.

As mentioned previously, if you inherited an IRA prior to 2020, then you can “stretch” the RMDs from the IRA you inherited over your life expectancy by taking only the minimum amount every year.

The rules for IRAs inherited after 2020 changed and, for adult children who inherit IRAs, they now have 10 years to completely withdraw the balance of an IRA that they inherited.

If the IRA was inherited before the deceased owner started their own RMDs, then the inheritor simply has 10 years to completely withdraw the balance of the IRA that they inherited.  If the IRA was inherited after the deceased owner started their own RMDs, then the inheritor needs to continue to take minimum distributions based on their own life expectancy during years one through nine of the 10-year withdrawal window.

Exceptions to the 10-year rule include surviving spouses, the disabled and minor children, who can continue to stretch their RMDs by taking only minimum distributions based on their life expectancy each year.  Once a minor reaches the age of majority, however, then the 10 year rule will apply to any remaining balance in the IRA that they inherited.

So the two big changes over the past few years to the RMD rule are the new starting ages (73 & 75) and 10-year rule for inherited IRAs.

What has not changed is that, if RMDs apply to you, then you need to make a note and make sure that you’ve taken care of yours for 2025.

What also has not changed is that all IRA withdrawals represent taxable income for federal income tax purposes.  This means that you need to factor in required minimum distributions into your projected income for estimated tax purposes, managing what tax bracket you fall into and any Medicare Part B & Part D (IRMAA) surcharges that may apply.

This has become particularly more challenging as a result of the 10-year rule.  Allowing an inherited IRA to continue to grow tax-deferred, even if you are taking the minimum required in years one through nine, will likely result in a significant withdrawal in year 10 with corresponding income tax consequences.  It’s important to talk with your advisor about this and determine how you can strategically, and voluntarily, take withdrawals that make the most sense for your specific tax situation.

Depending on the state you live, there may also be state income taxes on IRA withdrawals although the majority of states today either don’t tax IRA withdrawals or have an amount that can be excluded based on particular income limits.

If you don’t need RMD funds for any particular purpose, then you can take your RMD, withhold an appropriate amount of federal and/or state income taxes from it, and then simply reinvest it into any other taxable investment accounts you own.

Also if you don’t need RMD funds for any particular purpose, then consider using it to satisfy part or all of your annual charitable giving.

As long as you are over 70.5 years old, you can make a Qualified Charitable Distribution (“QCD”) from an IRA or inherited IRA up to $108,000 per year.  This will allow you to satisfy some or all of your RMD and avoid the income tax consequences on it and we have many clients who take advantage of QCDs as a planning opportunity.

The rules for IRAs, Inherited IRAs and RMDs on the same are complicated and the new legislation passed in the SECURE Act in 2020 only made the rules more complicated.

If you are unsure of the amount of your RMD, or if you should begin taking withdrawals from your retirement accounts, how they fit into your retirement income and/or how they affect your income tax and Medicare surcharge planning, the reach out to your ACM wealth advisor, who is well versed on this topic, for assistance.  The first step is just to make sure that you have your plan in place for any RMDs you need to take for 2025.

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