Understanding Required Minimum Distributions (RMDs) & Taxes

Introduction

Once you reach a certain age, the IRS requires you to begin withdrawing a minimum amount each year from most retirement accounts. These Required Minimum Distributions (RMDs) are not optional—and failing to take them can result in severe tax penalties.

This guide explains who must take RMDs in 2025, how they’re calculated, when to take them, how they’re taxed, and how to avoid costly mistakes, including proper IRS reporting and strategic planning tips.

What Are Required Minimum Distributions (RMDs)? (IRC § 401(a)(9))

RMDs are mandatory yearly withdrawals from certain retirement accounts starting at a specific age.

Applies To These Accounts:

• Traditional IRA
• SEP IRA
• SIMPLE IRA
• 401(k), 403(b), 457(b) plans (except Roth 401(k)s)
• Inherited IRAs (both Traditional and Roth)

Roth IRAs: No RMDs required during the original owner’s lifetime.

RMD Age Rules for 2025

Thanks to the SECURE 2.0 Act:

• If you turn 73 in 2025, you must begin RMDs by April 1, 2026.
• If you turned 72 before 2023, RMDs should already be in progress.
• Beginning 2033, the RMD age will increase to 75.

Important Dates:

• First RMD: Due by April 1 of the year after you turn 73
• Subsequent RMDs: Due annually by December 31

Tip: Taking your first RMD in April may result in two RMDs in one tax year (April and December), increasing your taxable income.

3. How Are RMDs Calculated?

RMD = Account Balance (as of December 31 of previous year) ÷ IRS Life Expectancy Factor

Use the Uniform Lifetime Table (Table III) in IRS Pub 590-B.

Example:

• IRA balance on 12/31/2024: $500,000
• Age 73 Life Expectancy Factor: 26.5
• RMD = $500,000 ÷ 26.5 = $18,867.92

How Are RMDs Taxed?

• RMDs are taxed as ordinary income at your marginal rate.
• They do not qualify for capital gains treatment.
• State taxes may also apply.

Example:

• RMD: $20,000
• Tax bracket: 22%
• Tax due: $4,400 federal + any state tax

RMD Penalties and How to Avoid Them

Missed RMD Penalty (IRC § 4974)

• 25% of the amount not withdrawn (reduced to 10% if corrected in 2 years).
• File Form 5329 to report and possibly request a waiver of penalty.

Example:
Missed RMD of $10,000

• Penalty: $2,500 (or $1,000 if corrected timely)

How to Avoid RMD Penalties:

• Set reminders for December 31 deadlines
• Consider automatic withdrawals
• Work with a CPA or financial advisor to plan ahead

Strategies to Reduce the Tax Impact of RMDs

6.1. Roth IRA Conversions Before Age 73

• Reduce future RMDs by converting Traditional IRA assets to Roth IRA
• Pay taxes now, enjoy tax-free growth and no RMDs

6.2. Qualified Charitable Distributions (QCDs) (IRC § 408(d)(8))

• Donate up to $100,000/year directly to a charity from your IRA
• Counts toward RMD, but excluded from income
• Must be 70½ or older to qualify

6.3. Use Lower-Income Years to Withdraw Early

• If you retire before 73, use early years to withdraw or convert while in a lower tax bracket

6.4. Aggregate RMDs for Multiple IRAs

• You can take the total RMD from one IRA, even if you own several
• This does not apply to 401(k)s—each account requires a separate RMD

IRS Forms You’ll Need

Common RMD Mistakes to Avoid

• Forgetting first-year RMD deadline (April 1 of following year)
• Taking RMDs from Roth IRAs – not required
• Missing RMDs from old 401(k) accounts
• Failing to aggregate IRAs correctly
• Not using QCDs if charitably inclined

Conclusion

Understanding and planning for RMDs is essential to avoid IRS penalties and unexpected tax bills. Strategies like Roth conversions, charitable giving, and early withdrawals can help reduce the tax impact.

To develop a personalized RMD plan, schedule a consultation with Anshul Goyal, CPA EA FCA. Book an appointment here:

About Our CPA

Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the U.S., an Enrolled Agent admitted to practice before the IRS, and a cross-border tax expert. He specializes in IRS compliance, retirement tax planning, and helping American families and Indian expatriates optimize distributions and reduce RMD-related taxes.

Frequently Asked Questions (FAQs)

 1. When do RMDs start in 2025?

RMDs begin the year you turn 73, with your first RMD due by April 1, 2026.

2. Are Roth IRAs subject to RMDs?

No, Roth IRAs are exempt from RMDs during the original owner’s lifetime.

3. What happens if I miss an RMD?

You could face a 25% penalty on the amount not withdrawn, reported on Form 5329.

4. Can I reduce my RMD taxes?

Yes. Use strategies like Roth conversions, QCDs, and withdrawal planning to lower your tax burden.

5. Do I have to take RMDs from all accounts?

Yes. Each 401(k) requires its own RMD, but IRAs can be aggregated.