By Matt Cherry, CFP®
If you’ve ever looked up how to navigate required minimum distributions (RMDs), you’ve probably found a mix of IRS language, half-explanations, and conflicting rules that don’t quite connect. It’s one of those topics that seems straightforward until you try to apply it to your own financial decisions.
In this article, I walk through how required minimum distributions work and where people tend to run into issues, so you can see how the rules apply in real situations.
RMD Basics: What You Need to Know
At a basic level, required minimum distributions are the amount the IRS requires you to withdraw each year from certain retirement accounts once you reach a specific age.
For most people today, that age is 73.
The rule applies to:
- Traditional IRAs
- SEP and SIMPLE IRAs
- Most employer-sponsored retirement plans like 401(k)s and 403(b)s
It does not apply to Roth IRAs during your lifetime.
How RMDs Are Calculated
The calculation itself is mechanical, but the inputs matter.
Each year, your RMD is based on:
- Your account balance as of December 31 of the previous year
- A life expectancy factor from IRS tables
For example:
- Let’s say your IRA balance on December 31 was $1,000,000.
- At age 73, your IRS life expectancy factor is approximately 26.5.
Therefore, your RMD would be: $1,000,000 ÷ 26.5 = $37,736.
That amount must be withdrawn during the year and is generally taxed as ordinary income.
As you get older, the life expectancy factor decreases, which means the percentage you must withdraw increases over time.
Timing Matters More Than People Think
The first year you’re required to take an RMD, you actually have a choice:
- Take it in that year.
- Or delay it until April 1 of the following year.
At first glance, delaying sounds appealing. But there’s a catch.
If you delay your first RMD into the next year, you’ll have to take two distributions in the same calendar year:
- The delayed first RMD
- Your second year RMD
That can create a noticeable spike in taxable income.
For example, if each RMD is $40,000, delaying means you report $80,000 of income in one year instead of spreading it out.
For executives, business owners, or retirees with multiple income streams, that can impact:
- Tax brackets
- Medicare premiums
- Taxation of Social Security
The Penalty for Missing an RMD
The penalty for missing an RMD is 25%, and potentially 10% if corrected quickly.
So if your RMD is $40,000 and you miss it entirely, the penalty could be:
- $10,000 (25%)
- Possibly reduced to $4,000 if corrected in time
This is one of the more avoidable penalties in the tax code, but it still shows up more often than you’d think, usually due to:
- Multiple accounts across custodians
- Inherited accounts with different rules
- Lack of coordination between tax prep and investment management
Why RMDs Deserve Attention Before Age 73
Most people wait too long to begin thinking about RMDs. In practice, earlier planning often leads to better outcomes.
For example:
- Roth conversions in lower-income years can reduce future RMDs.
- Managing withdrawals in the years leading up to 73 can smooth taxable income.
- Coordinating RMDs with other income sources can help avoid unnecessary tax spikes.
For someone with multiple retirement accounts and a seven-figure portfolio, these decisions compound over time.
What This Means for You
RMDs are a forced interaction between your retirement accounts and the tax system.
Handled passively, they simply create taxable income each year.
Handled intentionally, they can be part of a broader strategy that coordinates:
- Income timing
- Tax exposure
- Portfolio structure
And that’s typically where the real impact shows up.
Coordinating Required Minimum Distributions With Your Plan
If you’re still trying to sort through how to manage required minimum distributions with your specific accounts, it can help to look at them in the context of your overall financial picture, and not just as a standalone rule.
ABLE Financial Group regularly works with executives, business owners, retirees, and families to map out how RMDs interact with income, taxes, and long-term planning decisions. If you’d like to walk through how these rules apply to your situation, we’re always available for a conversation.
To learn more about our team and the ways we can help guide you, call 480.258.6104 or email adam@ablefinancialgroup.com today.
Frequently Asked Questions
What are required minimum distributions (RMDs) and when do they start?
Required minimum distributions are the minimum amounts the IRS requires you to withdraw each year from certain retirement accounts, including traditional IRAs and most 401(k) plans. For most individuals, RMDs begin at age 73. These withdrawals are generally taxed as ordinary income, which means they can impact your overall tax situation in retirement if not planned for properly.
How are required minimum distributions calculated each year?
RMDs are calculated using your retirement account balance as of December 31 of the previous year and a life expectancy factor provided by the IRS. As you age, the percentage you’re required to withdraw increases. While the formula itself is straightforward, mistakes often happen when accounts are spread across multiple custodians or when distributions aren’t coordinated with your broader tax strategy. That’s why many individuals turn to ABLE Financial Group for help calculating their RMDs accurately and aligning with their overall financial plan.
What happens if you miss a required minimum distribution?
If you fail to take your full RMD, the IRS can impose a penalty of up to 25% of the amount you should have withdrawn (potentially reduced to 10% if corrected quickly). Beyond the penalty, missing an RMD can create complications with taxes and long-term planning. Working with a firm like ABLE Financial Group can help you stay on track, avoid costly mistakes, and integrate RMDs into a tax-efficient retirement income strategy.
About Matt
Matt Cherry, CFP®, is a financial advisor at ABLE Financial Group, where he specializes in transition planning, Social Security strategies, and leveraging eMoney software to simplify complex wealth management. An Arizona State University alumnus, Matt is a dedicated fiduciary who focuses on helping clients navigate financial milestones with clarity and excellence. Outside of work, he’s a committed community volunteer with organizations like SARRC and a passionate yoga practitioner who enjoys exploring Arizona and Mexico with his two daughters.
