Learn how required minimum distributions work, when they apply, and strategies that may help high-net-worth individuals manage the tax implications of RMDs.

Required Minimum Distributions (RMDs) Explained

If you have assets in tax-deferred retirement accounts like traditional IRAs or 401(k)s, the IRS requires you to begin withdrawing a minimum amount each year once you reach a certain age. These withdrawals are known as required minimum distributions, or RMDs. Failing to take them on time, or withdrawing less than the required amount, can result in significant tax penalties.

For individuals with substantial retirement savings, the tax implications of RMDs can extend well beyond the withdrawal itself, potentially affecting your tax bracket, Medicare premiums, and long-term estate planning goals. Topics covered in this guide include:

• What RMDs are and who they apply to
• When RMDs begin and key deadlines to be aware of
• Penalties for missed or insufficient distributions
• Strategies that may help manage RMD-related tax considerations
• How RMDs interact with estate and legacy planning

What an RMD Is and Who It Applies To

A required minimum distribution is the annual minimum amount that retirement account owners must withdraw from certain tax-deferred accounts once they reach the applicable age. The purpose of RMDs is straightforward: the IRS allowed those funds to grow tax-deferred, and RMDs are the mechanism for eventually collecting tax on that money.

Accounts commonly subject to RMDs include:

• Traditional IRAs
• SEP IRAs and SIMPLE IRAs
• Many employer retirement plans, such as 401(k), 403(b), and 457(b) plans

Accounts generally not subject to RMDs during the original owner’s lifetime include:

• Roth IRAs (for original owners)

This distinction is worth keeping in mind for anyone who has pursued tax diversification across account types, as Roth IRAs offer more flexibility in terms of when and whether to take distributions. It's also worth noting that Roth 401(k) accounts were previously subject to RMDs, but the SECURE 2.0 Act eliminated that requirement beginning in 2024. 

When RMDs Start: The Required Beginning Date and Key Deadlines

Under current rules established by the SECURE 2.0 Act, most retirement account owners must begin taking RMDs in the year they reach age 73. That threshold is scheduled to increase to age 75 beginning in 2033.

There are two key deadlines to be aware of:

• For your first RMD, you have the option to delay the withdrawal until April 1 of the year following the year you turn 73. However, if you take advantage of that deferral, you will need to take your second RMD by December 31 of that same year, resulting in two taxable distributions in a single tax year.
• For all subsequent years, the deadline is December 31.

For individuals with higher incomes, that first-year doubling effect is worth careful consideration. Two RMDs in one calendar year can push you into a higher tax bracket, trigger or increase Income-Related Monthly Adjustment Amount (IRMAA) surcharges on Medicare premiums, and interact with other income sources in ways that may affect your broader tax picture.

How RMDs Are Calculated

The amount of each RMD is calculated by dividing the account balance as of December 31 of the prior year by a life expectancy factor from IRS tables. The table that applies depends on your situation:

• Uniform Lifetime Table: Used by most account owners to determine their annual RMD amount.
• Joint Life and Last Survivor Table: Applies if your sole beneficiary is a spouse who is more than 10 years younger, which typically results in a smaller required distribution. This can be a relevant planning detail for couples with a significant age difference.

Employer Plan Exception: The "Still Working" Rule

If you are still employed and participating in an employer-sponsored retirement plan, you may be able to delay RMDs from that specific plan until you retire. This exception applies only to the plan associated with your current employer, not to IRAs or plans from previous employers.

There is an important caveat for business owners: if you own more than 5% of the company sponsoring the plan, you cannot take advantage of this deferral regardless of whether you are still working.

For executives and business owners who may have retirement assets spread across multiple plans, this distinction can create both planning opportunities and potential pitfalls. It's worth reviewing which accounts are subject to RMDs and when, particularly if you have a mix of current and former employer plans alongside personal IRAs.

Penalties for Missed or Insufficient RMDs

Failing to take an RMD, or taking less than the full required amount, triggers an excise tax on the shortfall. Under the SECURE 2.0 Act, that penalty was reduced from 50% to 25% of the amount not distributed. If you correct the shortfall within a specific timeframe (generally by the end of the second tax year following the year the RMD was due), the penalty may be further reduced to 10%.

Even at the reduced rate, the cost of missing an RMD on a large retirement account can be substantial. For someone with a $2 million IRA, the annual RMD might be in the range of $75,000 or more, depending on age. A 25% penalty on that amount of over $18,000 would be significant.

Some practical steps that may help you avoid missed distributions include:

• Setting up automatic RMD withdrawals through your custodian.
• Reviewing custodian-provided RMD calculations each year.
• Working with a financial advisor to build RMD deadlines into your broader annual tax and withdrawal planning.

Tax Implications for Higher-Income Individuals

Because RMDs are taxed as ordinary income, they can meaningfully affect the tax picture for individuals with significant pre-tax retirement assets. The larger the account, the larger the required distribution, and the greater the potential impact on your overall tax situation.

There are several specific areas where RMDs can create ripple effects for higher-income retirees with significant pre-tax retirement balances:

• Higher marginal tax bracket. RMDs add to your adjusted gross income and can push you into a higher bracket.
• Medicare premium surcharges. Increased income from RMDs can trigger or increase IRMAA surcharges on Medicare Part B and Part D premiums, which are based on modified adjusted gross income from two years prior.
• Net Investment Income Tax. For some individuals, RMD income may interact with the 3.8% NIIT if it raises income above the applicable threshold.

RMD timing can also create “stacking” issues. If you defer the first RMD until April 1, you may take two RMDs in the same year, which can complicate estimated taxes, withholding, charitable planning, and capital gains decisions.

RMD Strategies for High-Net-Worth Households

While RMDs are mandatory, there are several strategies that may help manage their tax impact and fit them into a broader financial plan. Here are some common approaches:

• Qualified Charitable Distributions (QCDs). For the tax year 2026, individuals age 70½ and older can direct up to $111,000 per year from an IRA directly to a qualifying charity. A QCD can satisfy part or all of your annual RMD without increasing your adjusted gross income. QCDs are available only from IRAs, not from employer-sponsored plans.
• Roth conversions before RMDs begin. The years between retirement and the RMD start age can present an opportunity to convert traditional IRA assets to a Roth account while taxable income may be lower. Converting in those years can reduce future RMD amounts and the associated tax obligations, though each conversion is a taxable event and requires careful analysis of the current-year tax cost versus the potential long-term benefit.
• Asset location within the IRA. Because distributions are forced, some investors review which holdings sit inside pre-tax accounts versus taxable or Roth accounts, especially when managing concentrated positions and long-term growth expectations.
• Coordinating RMDs across multiple accounts. IRAs can often be aggregated for RMD purposes, while many employer plans generally cannot. This affects which accounts you draw from and how you manage withholding and cash flow.
• RMD timing within the calendar year. You can take RMDs earlier in the year or later, depending on withholding preferences, market considerations, and other income events. In your first RMD year, you may be able to delay the distribution until April 1 of the following year. However, that choice can result in two RMDs being taxed in the same calendar year.

RMD Planning Considerations 

1. Tax Brackets 
   RMDs add ordinary income, which can raise taxable income for the year.
2. Medicare IRMAA 
   Higher income from RMDs may increase Medicare Part B and Part D premiums.
3. Qualified Charitable Distributions
   Eligible IRA gifts to charity can count toward an RMD and may reduce AGI impact.
4. Roth Conversions 
   Pre-RMD conversions may reduce future required withdrawals, but create taxable income now.
5. Estate Planning
   Inherited retirement accounts can create taxable distributions for beneficiaries.

RMDs and Estate Planning

RMDs also play a role in how retirement assets transfer to the next generation. Beneficiary designations on retirement accounts determine who inherits those assets and under what distribution rules, making it important to keep those designations current and consistent with your broader estate plan.

Under the SECURE Act, most non-spouse beneficiaries who inherit a retirement account are now required to distribute the entire account within 10 years of the original owner's death. This is a significant change from the previous "stretch IRA" approach, which allowed distributions over the beneficiary's lifetime.

For heirs who are in their peak earning years, inheriting a large traditional IRA under the 10-year rule can result in substantial additional taxable income. Some strategies that may help manage the tax impact for heirs include:

• Making Roth conversions during the original owner's lifetime (so heirs inherit tax-free Roth assets)
• Using life insurance to offset potential tax costs
• Coordinating the timing of the original owner's RMDs and other withdrawals with the overall estate plan.

It's also worth noting that inherited IRA and employer plan RMD rules can differ materially from original owner rules and have been subject to evolving IRS guidance in recent years. IRS Publication 590-B is a helpful reference for the most current rules.

RMD FAQs

Should I delay my first RMD until April 1?

You can, but keep in mind that delaying means you'll need to take two distributions in one calendar year, which could increase your taxable income for that year. Whether the deferral makes sense depends on your income in both years and how the additional distribution might affect your tax bracket, IRMAA premiums, and other income-sensitive thresholds.

Do I have to take RMDs from each account?

It depends on the account type. If you have multiple traditional IRAs, you can calculate the total RMD across all of them and take it from whichever IRA or combination of IRAs you choose. For employer-sponsored plans like 401(k)s, each account's RMD must be taken from that specific plan.

What if I'm still working?

If you're still employed and participating in your current employer's retirement plan, you may be able to delay RMDs from that specific plan until you retire. This exception does not apply to IRAs or plans from former employers, and it does not apply if you own more than 5% of the sponsoring business.

What happens if I miss an RMD?

You'll owe an excise tax of 25% on the amount you failed to withdraw. If you correct the shortfall within the applicable timeframe, the penalty may be reduced to 10%. Filing IRS Form 5329 is required to report the missed distribution.

How do RMDs affect my broader tax plan?

RMDs are taxed as ordinary income and can influence a range of other planning decisions, from the timing of capital gains to the pacing of Roth conversions to charitable giving strategies. For individuals with larger retirement accounts, coordinating RMDs with your overall withdrawal and tax planning strategy is an area where professional guidance can be particularly helpful.

Integrating RMDs into a Broader Withdrawal Strategy

RMDs are one piece of a larger retirement income puzzle that may also include Social Security benefits, withdrawals from taxable investment accounts, Roth distributions, real estate income, pensions, and other sources. The order and timing of withdrawals from each of these sources can affect how much you pay in taxes each year and how long your overall portfolio may last.

For individuals with significant assets across multiple account types, this kind of coordination is often where working with a financial advisor can be most helpful. A well-structured withdrawal strategy considers not just the current year's tax implications but also how this year's decisions might affect future RMDs, tax brackets, Medicare premiums, and estate planning goals.

If you'd like to discuss how RMDs fit into your broader financial plan, contact EP Wealth to speak with a financial advisor near you.

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