Required Minimum Distributions

How it works

A required minimum distribution is a floor set by statute, not by portfolio performance. Each account's RMD is the prior December 31 balance divided by a life expectancy factor from the IRS Uniform Lifetime Table, or from the Joint and Last Survivor Table when the sole beneficiary is a spouse more than ten years younger, which produces a smaller required amount. The calculation says nothing about what the account earned during the year.

The starting age has been moved twice by legislation, first by the SECURE Act and then by SECURE 2.0, and is scheduled to move again, so the correct age depends on year of birth and should be read from current IRS guidance rather than an older source. The first year's distribution can be deferred to April 1 of the following year, but that stacks two distributions into one calendar year and can push both into a higher bracket. Every later year's deadline is December 31 with no extension mechanism.

Aggregation rules differ by account type. RMDs across multiple traditional IRAs can be totalled and taken from any one of them, but each employer plan must distribute its own amount, and 403(b) contracts follow their own separate aggregation rule. Roth IRAs carry no RMD during the original owner's lifetime, and SECURE 2.0 removed RMDs from designated Roth accounts inside employer plans beginning in 2024. A still-working exception lets a plan participant defer that plan's RMDs past the normal starting age where the plan permits it and the participant is not a 5% owner; it never applies to IRAs.

Distributions can be taken in kind, moving shares out at transfer-date value and resetting basis in the taxable account, which avoids a forced sale but not the tax. A qualified charitable distribution sends money directly from an IRA to a qualifying charity from age 70½, counts toward the RMD, and is excluded from income rather than deducted. Inherited accounts follow a separate regime, generally a ten-year window to empty the account under the SECURE Act, with annual distributions also required in some cases. The custodian typically calculates and reports the IRA figure, but the legal responsibility for taking the correct amount sits with the account owner.

What it pays

An RMD is not income the account generates. It is a forced conversion of balance into taxable cash, and the amount can be larger or smaller than what the portfolio actually earned that year. Only two inputs drive its size: the prior year-end balance and the divisor tied to age, so a strong market year raises the following year's required amount. The required percentage also rises every year on its own, because the life expectancy divisor shrinks, so RMDs grow as a share of the account over time regardless of returns.

Nothing requires the money to be spent. After tax it can be reinvested in a taxable account, and the underlying position can be preserved by distributing it in kind rather than selling it. The real effect tends to fall on the rest of the return: an RMD raises adjusted gross income, which can make more Social Security taxable, add a Medicare IRMAA surcharge two years later, and push other investment income across the net investment income tax threshold. A qualified charitable distribution is the one route that satisfies the requirement without adding anything to adjusted gross income.

Costs and taxes

The distribution is ordinary income to the extent the account holds pre-tax money, reported on Form 1099-R. Non-deductible IRA basis reduces the taxable portion pro rata and is tracked on Form 8606, so an RMD is not always fully taxable. Missing or under-taking an RMD triggers an excise tax on the shortfall, cut by SECURE 2.0 from 50% to 25%, and to 10% where corrected inside a defined window, reported on Form 5329; the IRS will waive it for reasonable cause when the shortfall is made up and an explanation is attached.

Withholding on IRA distributions is optional and elected on Form W-4R. Taking a full year's withholding from a single December RMD is a recognised mechanic, because withholding is treated as paid evenly across the year regardless of when it was actually withheld. Custodial and advisory fees paid from the account do not count toward satisfying the RMD.

An RMD cannot be rolled over or converted to a Roth. The required amount must come out first, and only amounts above it are eligible for conversion. For accounts holding alternative assets, the annual fair market valuation that feeds the calculation is itself a cost, and a stale or disputed valuation creates exposure in both directions, understating or overstating what must be distributed.

Liquidity and time commitment

The obligation is annual and unforgiving on timing, so the account must be able to produce settled cash before December 31. Illiquid holdings are the hard case: private funds, real estate and non-traded notes are measured against a valuation that may not be realisable on demand. In-kind distribution is the standard workaround where cash cannot be raised, and it requires the custodian's process plus a defensible valuation of the interest transferred.

The IRA aggregation rule is practically useful here, since the total required amount can be taken from the most liquid IRA, leaving an illiquid one untouched. The annual work itself is small: confirm the December 31 balances, confirm the divisor, confirm the distribution posted before year-end. It cannot be skipped, and custodial queues in December are routinely slow, which turns a small task into a late scramble if left too long.

How it goes wrong

The most common first-year error is missing the deadline entirely because the April 1 grace date was mistaken for a permanent deadline rather than a one-time deferral. Taking an employer plan's RMD out of an IRA does not satisfy the plan's requirement, since aggregation rules are not interchangeable across account types. Rolling over an amount that included the year's RMD creates both an RMD failure and an excess contribution in the receiving IRA, and converting to a Roth before satisfying the year's required amount is not permitted and has to be corrected.

Timing collisions cause their own damage: a large RMD landing in the same year as a capital gain or a Roth conversion can spike modified adjusted gross income and trigger an IRMAA surcharge two years out. An inherited account left untouched on an old stretch-IRA assumption can arrive at the ten-year deadline with the whole balance still inside, forcing a large single-year distribution.

Mechanical failures round out the list: submitting a December distribution request too late for trades to settle and the payment to post by the 31st, an illiquid self-directed IRA with no ready buyer and no cash reserve, leaving only an in-kind distribution or a forced sale, and assuming a custodian's calculated figure covers everything when it only ever covers the accounts that custodian holds.