How RMDs Are Taxed
— and Six Ways to Shrink the Bill

The Bill for the Deduction

Every dollar in a traditional 401(k) or IRA is a dollar the IRS has never taxed. Required minimum distributions are how it finally collects: starting at age 73 (born 1951–1959) or 75 (born 1960 or later), you must withdraw a minimum amount each year and pay ordinary income tax on it — needed or not, market up or down.

RMDs apply to traditional IRAs, SEP and SIMPLE IRAs, 401(k)s, 403(b)s, 457(b)s, and the federal TSP. Two happy exceptions: Roth IRAs have never had lifetime RMDs, and since 2024 Roth 401(k)s don't either.

The Mechanics: One Division Problem

Each year's RMD is last December 31's balance divided by an IRS life-expectancy divisor for your age. (One exception: if your sole beneficiary is a spouse more than ten years younger, a joint-life table with gentler divisors applies.) Meet Ray: single, turning 73 in 2026, with $900,000 in his IRA at the end of last year. The divisor at 73 is 26.5:

The divisor shrinks every year, so the percentage you're forced to withdraw accelerates with age:

That acceleration is why a comfortable balance at 73 can become a bracket-and-IRMAA problem at 85 — the percentage nearly doubles while the balance often keeps growing. The RMD Forecaster projects the whole curve (Ray's numbers are pre-loaded).

The First-Year Trap

Your very first RMD has a special deadline: April 1 of the following year (the "required beginning date"). Every later RMD is due December 31. The trap: if Ray delays his first RMD into next year, that year contains two RMDs — the delayed $33,962 plus the next year's roughly $35,294 — about $69,000 of forced income in a single tax year, enough to jump brackets and cross an IRMAA cliff.

Delaying only makes sense when the first-RMD year has unusually high other income (a final salary, a big sale) that the second year won't. Otherwise: take year one's RMD in year one.

How the Tax Actually Lands

• Ordinary income, always. Even if the custodian sells appreciated stock to fund it, none of an RMD gets capital-gains treatment — the deferral deal was ordinary rates on the way out.
• It stacks on everything else. RMDs pile on top of Social Security (often dragging more of it into taxability) and count fully toward the MAGI that sets Medicare IRMAA surcharges two years later.
• Most states tax it too. A handful exempt retirement income — if a move is in your plans anyway, sequencing matters.
• Withholding is optional but useful. Custodians withhold 10% federal by default unless you elect otherwise — and there's a planning gem here, covered in the list below.

Miss One and It Costs — Less Than It Used To

The old penalty for a missed RMD was a brutal 50%. SECURE 2.0 cut it: 25% of the shortfall — for Ray, $8,491 — falling to 10% ($3,396) if you correct it within the IRS's correction window. Fix it fast, file Form 5329, and if the miss was a reasonable error (illness, bad advice, a moved account), attach an explanation and request a waiver — the IRS grants them routinely.

Six Ways to Shrink the Bill

1. Qualified charitable distributions (70½+). Money sent directly from your IRA custodian to a charity counts toward the RMD but never touches your income — up to $111,000 per person in 2026. If Ray gives $10,000 this way, his taxable RMD drops to $23,962. Rules: IRAs only, direct custodian-to-charity transfer, and no donor-advised funds or private foundations.
2. Shrink the balance before RMD age. Every dollar Roth-converted in your sixties is a dollar that never appears in a divisor calculation. This is the whole thesis of the sweet-spot guide and the conversion modeler.
3. Still working at 73? Your current employer's 401(k) can wait until you actually retire (if the plan allows it and you don't own 5%+ of the company). IRAs and old employers' plans get no such break — which cuts both ways when deciding whether to roll old plans in or out.
4. Aggregate your IRAs. With several IRAs, compute each RMD but take the total from whichever account suits you — the one holding bonds, the one you're simplifying away. 401(k)s must each pay their own.
5. Use December withholding as your tax payment. Tax withheld is treated as paid evenly through the year — unlike estimated payments, which are credited when made. Withholding heavily from a late-year RMD can retroactively cover the whole year's liability and erase underpayment penalties. A clean trick for conversion years especially.
6. Distribute in kind. If selling feels wrong, move shares as-is to a taxable account. The tax is identical, but you stay invested and the distributed value becomes your new basis — future growth gets capital-gains treatment instead of ordinary rates.

Frequently Asked Questions