What you need to know about required minimum distributions
If you have spent years saving into a 401(k), 403(b), IRA, or similar retirement plan, there is a point where the IRS stops letting you simply defer taxes and starts requiring you to take money out.
That point is called a required minimum distribution, or RMD.
Understanding how RMDs work can help you:
Reduce the risk of unnecessary penalties
Plan your retirement income more intentionally
Coordinate taxes across Social Security, pensions, and investment withdrawals
In this article, we will walk through the basics of RMDs in plain language so you can approach this part of retirement with more clarity and less surprise.
What is a required minimum distribution?
A required minimum distribution (RMD) is the minimum amount the IRS requires many investors to withdraw each year from most tax-deferred retirement accounts once they reach a certain age.
RMD rules generally apply to:
Traditional IRAs
Rollover IRAs
SEP and SIMPLE IRAs
Most employer plans: 401(k), 403(b), 457(b), and similar accounts
RMD rules generally do not apply (during the original owner’s lifetime) to:
Roth IRAs
Tax law can change, and there are special cases and exceptions, so it is important to confirm the rules for your own accounts with a tax professional.
The basic idea is straightforward:
You received a tax break when you contributed and as the money grew. RMDs are one way the IRS makes sure those dollars eventually show up as taxable income.
When do RMDs start?
Under current law, RMDs for many retirement accounts begin at age 73.
A few key timing points:
Most investors must take their first RMD by April 1 of the year after they turn 73.
After that, an RMD is generally due every year by December 31.
Example:
You turn 73 in 2025.
You may take your first RMD anytime during 2025, but no later than April 1, 2026.
If you wait until early 2026, you will likely also owe your second RMD by December 31, 2026, which means two RMDs in the same calendar year. That can increase your taxable income for that year.
RMD rules for inherited IRAs and other beneficiary accounts are different and can be more complex, so those deserve a separate conversation with your adviser and tax professional.
How your RMD is calculated
RMDs are based on two main numbers:
Your account balance on December 31 of the prior year
A life expectancy factor taken from an IRS table (often the Uniform Lifetime Table for many account owners)
In simplified form:
RMD = Prior-year 12/31 account balance ÷ IRS life expectancy factor
Example (using rounded numbers for illustration only):
You are 73.
Your traditional IRA was worth $1,000,000 on December 31 of last year.
The IRS table produces a factor that works out to roughly 3½% in the first year.
In that scenario, your required minimum distribution for the year would be in the neighborhood of $35,000.
A few important details:
The balance used is the prior year-end value, even if your investments move up or down before you actually take the RMD.
Each year, the IRS factor adjusts as you age, so the percentage of your balance you must withdraw typically rises over time.
If you have multiple traditional IRAs, you may be able to calculate the RMD for each and then withdraw the combined total from one or more of those IRAs.
Employer plans (such as 401(k)s) generally must each satisfy their own RMD separately.
Custodians often calculate an RMD amount for you, but it is still important to verify the number and confirm that the required amount is actually distributed.
Where can your RMD go?
The IRS requires the money to leave the tax-deferred account and be treated as a distribution. It does not require you to spend it.
Common options include:
Depositing your RMD into a checking or savings account to help cover living expenses
Transferring it to a non-retirement investment account (a taxable brokerage account)
Using qualified charitable distributions (QCDs) from an IRA (if you are eligible), which may allow you to send money directly to charity and reduce the portion of the distribution included in taxable income
The best choice for you depends on your broader retirement income plan, tax bracket, and legacy goals, which is why coordinating with your adviser and tax professional can be helpful.
How RMDs are taxed
When you take an RMD from a traditional IRA or most employer retirement plans, the amount you withdraw is generally taxed as ordinary income at the federal level.
Your overall tax outcome will depend on:
Your filing status (single, married filing jointly, etc.)
Your other sources of income (Social Security, pension income, wages, rental income, and so on)
Deductions, exemptions, and credits available to you
State tax rules can also play a role:
Some states do not tax certain retirement distributions.
Others partially or fully tax IRA and 401(k) withdrawals.
A few states are considered more favorable to retirees than others.
Because tax rules vary and may change, it is important to review the details of your situation with a CPA or tax professional before making decisions.
What happens if you miss an RMD?
Missing an RMD can be a costly mistake.
If you do not take the full required minimum distribution by the deadline, the IRS may apply an excise tax on the amount that should have been withdrawn but was not.
Under current rules, that penalty can be as high as 25% of the shortfall.
In some cases, if the mistake is corrected within a defined window and certain conditions are met, the IRS may allow for a reduction in the penalty.
The penalty is in addition to the regular income tax owed on the distribution itself.
Correcting a missed RMD often involves:
Taking the missed distribution
Filing the appropriate IRS form
Potentially requesting that the IRS waive or reduce the penalty if there was a reasonable error and steps are being taken to fix it
Because penalties can be significant, many investors prefer to review RMD status with their adviser well before year-end.
Practical ways to stay ahead of RMDs
A required minimum distribution does not have to be a year-end surprise. A few planning ideas to consider:
Start the conversation early
Begin talking about RMDs with your adviser in your late 60s or early 70s, especially if you have larger tax-deferred balances.
Decide on a withdrawal pattern
You can:
Take the RMD in monthly installments throughout the year, which may help with cash-flow planning, or
Take it as a single distribution once a year
Either way, the total taken by December 31 needs to at least equal the required amount.
Coordinate across accounts
If you have several IRAs and old workplace plans, a consolidation strategy may make tracking and satisfying RMDs simpler. This type of consolidation also has its own pros and cons that should be reviewed before moving assets.
Double-check the numbers
Most custodians provide an RMD calculation, but you and your adviser can compare it with:
The prior year-end statement balance
The appropriate IRS life expectancy factor
This additional step may help catch errors early.
Think about taxes, not just withdrawals
RMDs are just one piece of your overall tax picture. It can be helpful to look at them alongside:
Social Security claiming strategies
Pension income
Capital gains and losses
Possible Roth conversions
Thoughtful planning may help you manage how much of your income shows up in higher tax brackets or affects things like Medicare premium surcharges.
Summary
Required minimum distributions are the mechanism the IRS uses to eventually tax money that has grown tax deferred in IRAs and workplace retirement plans. Understanding when RMDs start, how they are calculated, and how they interact with your other income can help you avoid penalties and make more informed decisions about your retirement cash flow. Working with your adviser and tax professional can turn RMDs from a last-minute obligation into a planned part of your overall retirement strategy.
How Hershey Financial Advisers can help
RMDs are simple in concept, but in practice they sit at the intersection of:
Tax planning
Investment strategy
Retirement income needs
Legacy and estate considerations
At Hershey Financial Advisers, our team works with clients to:
Map out when RMDs are expected to begin and how large they may be over time
Decide how and when to take distributions in a way that aligns with their income needs and tax picture
Coordinate RMDs with Social Security, pensions, Roth accounts, and other assets
Put processes in place that may reduce the likelihood of missed distributions and last-minute rushes at year end
If you are:
Approaching age 73 and want to better understand how RMDs may affect you
Already taking RMDs and wondering if your current approach still fits your goals
Trying to balance withdrawals today with long-term goals for a spouse, children, or charities
…a conversation with an adviser may be a helpful next step.
You are welcome to reach out to the team at Hershey Financial Advisers. We can walk through your accounts, your timeline, and your questions in clear, practical terms so that RMDs become a planned part of your retirement strategy rather than an unwelcome surprise.
Important note: This article is for educational purposes only and does not provide tax, legal, or accounting advice. Tax laws and IRS rules can change, and their impact can vary based on your individual circumstances. You should consult your CPA, tax adviser, or legal professional regarding your specific situation before making decisions about required minimum distributions.