Understanding Required Minimum Distributions (RMDs) and How to Plan for Them

By Vigilant Wealth Management on July 14, 2025

You’ve spent the last several decades responsibly saving as much as possible in a tax-efficient manner, including by contributing to your tax-deferred accounts. Now it’s finally time to enjoy your retirement, but a new, possibly daunting era of managing cash flow and taxes awaits.

An important step in preparing for this new era is understanding required minimum distributions (RMDs), the IRS-mandated withdrawals you will need to take from your tax-deferred accounts.¹ Knowing ahead of time how they are calculated, roughly how much of your overall spending they might cover, and their tax consequences can pay off by helping you make decisions about how to optimize them.

To help, here is an overview of RMDs and examples of strategies you may want to consider when you begin taking them.

WHAT ARE RMDs?

Taxes on assets held in many retirement accounts — such as most IRAs and 401(k)s — are deferred. Contributions to the accounts are made on a pre-tax basis, and the investments within them are allowed to grow tax-free until they’re withdrawn, at which point they become subject to income taxes.

To ensure that retirement accounts are not merely vehicles used to transfer assets to heirs, thereby avoiding income and estate taxes, IRS rules require that participants withdraw specified minimum amounts annually. In this way, the government “harvests” taxes that participants avoided through pre-tax contributions and tax-deferred growth during the accumulation phase of their retirement savings.

Generally, the following tax-deferred and employer-sponsored accounts are subject to RMDs:

• TRADITIONAL IRAS
• SEP IRAS
• SIMPLE IRAS
• 401(K) PLANS
• 403(B) PLANS
• 457(B) PLANS
• PROFIT-SHARING PLANS
• OTHER DEFINED-CONTRIBUTION PLANS
• ROTH IRA BENEFICIARIES

Note: Roth IRAs do not require withdrawal until after the death of the owner, but beneficiaries of a Roth IRA are subject to RMD rules. As such, in some situations, converting your existing account into a Roth IRA may enable you to reduce your tax liabilities while in retirement. If you are 70 1/2 or older, you can make a qualified charitable distribution (QCD) from your IRA of up to $108,000 to a qualified charity. This distribution counts toward your RMD and is excluded from your taxable income, even if it exceeds your RMD.

WHEN MUST I BEGIN TAKING RMDS?

Retirement account owners are required to begin taking RMDs by April 1 of the calendar year following the year in which they reach age 73. This is the latest date on which the owner can take the first RMD from the account without a penalty tax.

For example, if you turned 73 in 2025, the latest date to take your 2025 distribution is April 1, 2026. But by waiting until this date, you would need to take two withdrawals in 2026 — the 2025 distribution by April 1 and the 2026 distribution by December 31. Depending on your situation, it may be better from a tax perspective to take the 2025 distribution by December 31, 2025. Then, you would need to take future RMDs by December 31 of each new tax year to avoid an excise tax.²

You may postpone taking required minimum distributions (RMDs) until April 1 of the year following your retirement, but only if both of the following conditions are met:

1. The distribution is from your current employer-sponsored retirement plan, i.e., 401(k)s and 403(b)s. IRA distributions do not qualify, including SEP IRAs and SIMPLE IRAs
2. You don’t own more than 5% of the company that maintains the plan

Note: Starting January 1, 2033, the RMD age will further increase to 75. If you were born in 1960 or later, your required beginning date for RMDs will be age 75.

HOW ARE RMDS CALCULATED?

The Uniform Lifetime Table from the IRS is used to calculate required minimum distributions from your applicable retirement accounts — unless your spouse is the sole beneficiary for your retirement account and is more than 10 years younger than you.

To determine the required minimum distribution for any distribution calendar year (a calendar year for which a minimum distribution is required), identify (1) your account balance on the last valuation date of the preceding year, (2) your age on your birthday in the distribution calendar year, and (3) the divisor that corresponds to that age in the Uniform Lifetime Table.

Please note that with recent revisions to the IRS’s life expectancy tables, RMD payouts to beneficiaries if the account owner dies before January 1, 2022, may be determined on the new tables in certain situations. Please consult your advisors for more information.

THE FOLLOWING EXAMPLE ILLUSTRATES AN RMD CALCULATION:

Margaret is 77 years old and owns an individual retirement account that has a previous year-end market value of $300,000.

The distribution period that corresponds to Margaret’s age is 22.9, so her RMD calculation would look like this:

Keep in mind that while you must make a minimum withdrawal, there’s nothing stopping you from withdrawing more than that amount, although you should consult with your financial advisor before doing so. Also, note that if you own more than one retirement account, you’re responsible for making RMDs from each one, and these amounts must be calculated separately.

WHAT’S THE PENALTY FOR MISSING AN RMD?

Failing to comply with the RMD rules results in a severe penalty. Before 2023, a 50% excise tax would have been charged. Under the SECURE 2.0 Act, the excise tax rate dropped to 25% (and can be further reduced to 10% if the RMD is corrected within two years) on the difference between the amount that should have been distributed (the RMD) and the amount distributed. For example, if you should have taken a $50,000 RMD, you would owe a penalty of $12,500. If you corrected it within two years, you would only owe $5,000. This penalty tax is in addition to any ordinary income tax due on the distribution.

WHAT RMD-RELATED STRATEGIES SHOULD I CONSIDER?

While RMDs are just that — required — there are certain financial planning strategies that may help you take advantage of them more efficiently. Below are a few examples:

• PROCESS: First and foremost, make sure you have a plan in place for taking the withdrawals. Talk to your advisors about their approach — how and when they might remind you, how they collaborate with one another (i.e., your accountant with your financial advisor), etc.

• INCOME-LIABILITY MATCHING: Try to plan so that you can time your RMD around large, expected expenses and thereby avoid unnecessarily needing to sell assets from one of your other accounts to fund them.

• IN-KIND TRANSFERS: Your RMD does not need to be in the form of cash. Instead, you can transfer a certain number of shares of a mutual fund or stock, for example, if the value of the shares on the day of distribution is at least equal to your RMD. This strategy can particularly make sense for assets that you believe are at temporarily depressed values. If so, when you make the withdrawal, the assets would be taxed at ordinary income rates, but at lower valuations. And thereafter, you would owe taxes on appreciation only when you sell them, and at a more favorable capital gains tax rate.

• ROTH CONVERSIONS: Roth conversions can help reduce your future RMD by lowering the balance in traditional IRAs. Since Roth IRAs are not subject to RMDs during the original owner’s lifetime, converting gradually can allow more money to grow tax-free and can give you greater control over your taxable income in retirement. This strategy may also help avoid being pushed into higher tax brackets or triggering Medicare premium surcharges later in retirement due to increasing RMDs.

The above techniques are simply examples of how advanced planning can lead to more efficient use of your RMDs.

¹ Retirement Plans | Internal Revenue Service. (n.d.). https://www.irs.gov/retirement-plans

² Congress.gov,H.R.2617-ConsolidatedAppropriationsAct, 2023 (https://www.congress.gov/bill/117th-congress/house-bill/2617/text)