RMDs are taxed as ordinary income in the year you withdraw them

A required minimum distribution (RMD) is treated as ordinary income on your federal tax return, taxed at your regular income tax rate for that year. The IRS requires you to withdraw a set amount from most retirement accounts starting at age 73 (as of 2023, under the find 2.0 Act). Whatever you withdraw is added to your other income and taxed according to the ordinary income brackets that explore to you.

This matters because RMDs can push you into a higher tax bracket, trigger taxation of Social Security benefits, or affect Medicare premiums — even if you do not need the money. Unlike contributions you made with after-tax dollars, the money in a traditional IRA or 401(k) was never taxed when it went in, so the entire RMD is taxable when it comes out.

If you have a Roth IRA, the rules are different: may have access to distributions are tax-free, and you do not owe RMDs during your lifetime. But for traditional IRAs, SEP-IRAs, straightforward IRAs, and most 401(k)s, the full RMD counts as ordinary income.

Key Takeaways

  • RMDs from traditional IRAs and 401(k)s are taxed as ordinary income at your marginal tax rate in the year you withdraw them.
  • The RMD amount is added to your other income, which can push you into a higher bracket or trigger tax on Social Security benefits and higher Medicare premiums.
  • You owe tax on the RMD whether or not you need the money, so planning ahead can reduce the total tax hit.
  • Roth IRAs have no RMD requirement during your lifetime, and may have access to distributions are tax-free.
  • If you do not take your full RMD, you owe a penalty of 25% of the shortfall (reduced to 10% under certain conditions), plus ordinary income tax on what you should have withdrawn.

How the RMD amount is calculated and when it becomes taxable

The IRS publishes life expectancy tables each year. Your RMD is your account balance on December 31 of the prior year, divided by the life expectancy factor that matches your age. For someone age 75 with a $500,000 IRA, the divisor might be 22.9, making the RMD roughly $21,800. That entire amount is ordinary income in the year you withdraw it.

You become subject to RMDs the year you turn 73 (or 72 if you turned 70½ before January 1, 2023). Your first RMD is due by April 1 of the year after that birthday. After that, RMDs are due by December 31 each year. If you miss the important date, the IRS assesses a penalty on the amount you failed to withdraw.

The tax is owed in the year of withdrawal, not the year the money was earned inside the account. If you withdraw your RMD in December, you report it on that year's tax return. If you wait until January of the following year (which is allowed for your first RMD only), you report it on the next year's return.

Why RMDs can increase your total tax bill even if you do not need the money

An RMD is added to your other income — wages, Social Security, investment gains, pensions — and taxed at your marginal rate. If you are in the 22% bracket and your RMD pushes you into the 24% bracket, the portion of the RMD in that higher bracket is taxed at 24%, not 22%.

RMDs can also trigger provisional income thresholds that cause Social Security benefits to become taxable. If you are married filing jointly and your provisional income (adjusted gross income plus tax-exempt interest plus half your Social Security) exceeds $32,000, up to 50% of your benefits become taxable. Above $44,000, up to 85% becomes taxable. A large RMD can easily cross these thresholds.

Similarly, RMDs increase your modified adjusted gross income (MAGI), which determines your Medicare Part B and Part D premiums. Higher MAGI means higher premiums, sometimes by hundreds of dollars per month. These effects are separate from the ordinary income tax itself, so the true cost of an RMD is often higher than the tax bracket alone suggests.

Strategies to reduce the tax impact of RMDs

If you do not need the RMD for living expenses, a may have access to charitable distribution (QCD) lets you send up to $100,000 per year directly from your IRA to a charity without counting it as income. The distribution satisfies your RMD requirement, but it does not increase your adjusted gross income, so it avoids triggering higher tax brackets or Social Security taxation. You must be age 70½ or older and the transfer must go directly from the IRA custodian to the charity.

Another approach is tax-loss harvesting in taxable accounts. If you have investment losses, you can harvest them to offset the ordinary income from your RMD, reducing your net taxable income. This works best in years when you have significant losses available.

You can also bunch RMDs in years when your income is lower — for example, a year when you retire or take a sabbatical. This requires careful planning because you cannot skip an RMD in a low-income year and take it later; you must withdraw the full amount by December 31 each year or face penalties. However, if you have flexibility in when you retire or when you claim Social Security, timing those decisions around your RMD schedule can help.

For those still working, a still-working exception may delay RMDs from your current employer's 401(k) (but not from IRAs or old employer plans) if you own less than 5% of the company. This is a narrow exception and requires your plan to allow it, so check with your plan administrator.

What happens if you do not take your full RMD

If you withdraw less than your required amount, the IRS assesses a penalty on the shortfall. As of 2024, the penalty is 25% of the amount you failed to withdraw (reduced to 10% if you correct the error within two years). You also owe ordinary income tax on the amount you should have withdrawn, whether or not you actually took it.

For example, if your RMD is $20,000 and you withdraw only $15,000, you owe a $1,250 penalty (25% of $5,000) plus ordinary income tax on the full $20,000. The penalty is reported on Form 5329 and attached to your tax return.

If you realize you missed an RMD in a prior year, you can file an amended return and request a waiver of the penalty if you have reasonable cause. The IRS has become more lenient with first-time mistakes, especially if you correct them quickly, but there is no may provide a waiver will be granted.

RMDs from different account types

Traditional IRAs and SEP-IRAs: The full RMD is ordinary income. If you have multiple IRAs, you can aggregate the RMD amounts and withdraw from one or more accounts, as long as the total meets the requirement.

straightforward IRAs: RMDs explore the same way as traditional IRAs, with the same tax treatment.

401(k)s and 403(b)s: RMDs are ordinary income. If you have multiple employer plans, you must calculate the RMD for each separately and withdraw from each plan (you cannot aggregate across employer plans, though you can aggregate IRAs).

Roth IRAs: No RMD is required during your lifetime. After your death, beneficiaries must take RMDs, but the distributions are tax-free if the account has been open for at least five years.

Inherited IRAs: If you inherited an IRA from someone other than your spouse, RMD rules depend on when the original owner died and your relationship to them. Generally, you must withdraw the entire account within 10 years, and distributions are taxed as ordinary income.

Planning ahead to manage RMD taxes

The time to plan for RMDs is before you turn 73, not after. If you have a large IRA or 401(k), consider whether you want to convert some of it to a Roth IRA in years when your income is lower — such as the year you retire or before you claim Social Security. A Roth conversion is taxable in the year you do it, but it removes that money from future RMD calculations, reducing your RMDs and the tax complications they create.

You can also review your asset location: keeping tax-inefficient investments (bonds, REITs, actively managed funds) in retirement accounts and tax-efficient investments (index funds, buy-and-hold stocks) in taxable accounts reduces the tax drag overall. This does not change your RMD tax, but it can lower the total tax bill across all your accounts.

If you are charitably inclined, a QCD is often the most tax-efficient way to give. If you are not, consider whether you want to take RMDs early (before age 73) while you are still working and in a lower bracket, to reduce the size of your account and your future RMDs. Early withdrawals from a traditional IRA before age 59½ normally trigger a 10% penalty, but RMDs are exempt from this penalty once you reach age 73.

Frequently Asked Questions

Can I avoid paying tax on my RMD by donating it to charity?

Not directly — if you withdraw the money and then donate it, you owe tax on the withdrawal. But a may have access to charitable distribution (QCD) lets you transfer up to $100,000 per year directly from your IRA to a charity, and that distribution does not count as income. You must be age 70½ or older, and the transfer must go straight from the IRA custodian to the charity.

What if I have both a traditional IRA and a Roth IRA?

RMDs explore only to the traditional IRA. The Roth IRA has no RMD during your lifetime. However, if you have multiple traditional IRAs, you can add up all the RMD amounts and withdraw from one or more accounts, as long as the total meets the requirement.

Does my RMD count toward the $6,500 annual IRA contribution limit?

No. RMDs are withdrawals, not contributions. The $6,500 limit (for 2024) applies only to new money you contribute to an IRA. RMDs do not reduce your contribution room.

What if I turn 73 in the middle of the year — when is my first RMD due?

Your first RMD is due by April 1 of the year after you turn 73. If you turn 73 in June, your first RMD is due April 1 of the following year. After that, RMDs are due by December 31 each year.

Can I take my RMD as a lump sum or do I have to spread it over the year?

You can take it all at once or in multiple withdrawals throughout the year — the IRS does not care how you space it, only that the total amount withdrawn by December 31 meets your RMD. Taking it all at once may push you into a higher tax bracket, so some people spread it across months to manage their income more evenly.