If you’re saving money in a 401(k) or traditional IRA for retirement, you probably know that taxes are deferred on these accounts—often over many decades. However, the government will eventually seek to collect taxes on these funds, which often occurs when retirees are required to take minimum distributions from their plans.

What is an RMD?

RMDs are the minimum amount of money one must withdraw from specific tax-deferred retirement accounts beginning at age 73 (increasing to age 75 in 2033).

More specifically, RMD rules apply to various employer-sponsored retirement plans including 401(k), 403(b), profit-sharing, and 457(b) plans as well as traditional IRAs and IRA-based plans such as SEPs, SARSEPs, SIMPLE IRAs, and Roth IRAs (following the owner’s death).

Those impacted are required to take their RMDs by December 31 of each year, but a couple of options are in fact available with respect to taking your very first RMD.

For example, if you turn 73 in 2025, you can do so by either December 31, 2025 or April 1, 2026. Just know that no matter which option you choose, you’ll need to take your second RMD by December 31, 2026.

How RMDs are calculated

You can generally divide the balance of all your retirement plans (as of December 31 of the previous year) by a life expectancy factor provided by the IRS to calculate your RMD.

To illustrate, let’s assume you have a traditional IRA with a balance of $500,000 as of December 31, 2024. We’d first locate your age within the IRS Uniform Lifetime Table and the corresponding “life expectancy factor,” which is 26.5 in this example (assuming you’ve already turned 73) but changes yearly. We’d then divide your IRA balance of $500,000 by 26.5 and get $18,867.92: your RMD for the year and the amount you must withdraw from your IRA by April 1, 2026.

Note that if your spouse is the sole account beneficiary and more than ten years younger than you, you’d refer to the Joint Life and Last Survivor Expectancy Table rather than the Uniform Lifetime Table to perform this calculation—as the former factors in both of these ages, resulting in a longer life expectancy and thus reducing your RMD.

Those with multiple IRA accounts, meanwhile, must calculate the RMD separately for each but can withdraw money from one or more IRA (e.g., the account with the lowest balance).

This rule is much different than if you have multiple qualified retirement plans or employer-sponsored such as 401(k)s or 401(b)s. In this scenario, you’d be required to take your RMD separately from each account—meaning those with two 401(k) accounts, for example, would have two different checks or deposits on their hands.

Penalty for not taking RMDs

If your circumstances dictate you withdraw more than the minimum amount required, you can! However, keep in mind this may involve tax implications as your withdrawal will be taxed as ordinary income (i.e., the same rate as any wages, interest income, or short-term capital gains).

Alternatively, if you fail to take the full amount of your RMD by the required deadline, you may face a hefty penalty and be liable for a 25% tax on the amount not withdrawn. Note this penalty can be reduced even further (to 10%) if you correct it in a timely fashion by withdrawing the required amount and submitting an updated tax return on time. Furthermore, you can seek out IRS help in an attempt to waive this penalty but will need a good reason to do so (e.g., a serious illness or assertion you had received lousy advice from a tax preparer or IRA sponsor).

How to avoid taxes on RMDs

If you’re wondering how to delay, minimize, or even avoid paying taxes on your RMDs, check out a few common strategies that may help:

Remaining employed

The “still working” exception allows you to delay RMD requirements for your employer-sponsored retirement account, provided you meet the following conditions:

· You’re still working (perhaps that’s obvious, given the name).

· You own less than 5% of the company you work for.

· You have an employer-sponsored retirement account from your current employer.

To be clear, “still-working” means you’re employed—regardless of how many hours you work per week. The primary benefit of a still-working exception is it allows you to postpone RMDs until April 1st of the year following your separation of service; however, this only applies to retirement accounts with your current employer rather than companies you no longer work for.

Implementing a Roth conversion

Another strategy to avoid RMDs is to roll over some of your savings into a Roth IRA, otherwise known as a Roth conversion. One key Roth IRA benefit is a lack of RMD mandates, and earnings can grow tax-free for as long as you’d like!

The biggest drawback of a Roth conversion, however, is the need to pay taxes on the amount of money converted as you’re moving pre-tax money. Consequently, conversions are sometimes expensive—which is why they’re most compelling when one’s income drops significantly (perhaps due to a job loss, irregular income year, or retirement in the absence of Social Security or RMDs), investment value sharply declines, or tax laws change (for the worse) as they may in 2026.

Employing a carve-out strategy

Two types of carve-out strategies are notable here. The first—known as a “qualified longevity contract” (or QLAC)—allows you to invest (or carve out) up to $200,000 (adjusted annually for inflation) in a special type of deferred income annuity that provides the account owner with a lifetime of income. As a result of this strategy, money invested in the QLAC is dropped from the IRA balance and therefore not subject to RMD mandates until a predetermined payout date no later than one’s 85th birthday.

The second type of carve out, which applies to company stock owned in one’s 401(k), is known as a “net unrealized appreciation strategy.” This option dictates you roll over the portion of your 401(k) invested in company stock into a taxable account—such as a brokerage account—with the remaining balance rolled into a traditional IRA.

The corresponding benefit is you’ll ultimately pay taxes on company stock on a cost basis (per the original value of the stock) rather than its market value. Moreover, any additional value gained after the stock is initially purchased is taxed as capital gains and not ordinary income: potentially saving you money. Employing this strategy will leave less money in your retirement account, in turn lowering your RMD dollar amount.

Donating distributions to a qualified charity

This strategy—also known as the “qualified charitable distribution (QCD) rule”—gives owners a few options including the ability to transfer up to $105,000 (indexed annually for inflation) from a traditional IRA account to an IRS-qualified charity every year rather than pay taxes to the government. The corresponding benefit? You’re allowed to exclude the QCD from your taxable income.

Executing an in-kind transfer

To take an RMD, you must typically sell assets to create enough cash to cover the RMD and then distribute said cash. In-kind transfers allow you to transfer or withdraw the asset itself; this involves moving assets from your retirement account to a taxable brokerage account without selling them (note you cannot roll them into a tax-deferred account).

To complete an in-kind transfer, you first choose which specific assets to transfer (e.g., stocks, bonds, or other securities held in your retirement account) and then work with your financial institution or financial advisor to initiate the transfer: moving assets from your retirement account to your taxable brokerage account. While the transfer itself isn’t a taxable event, you’ll still owe taxes on the value of transferred assets (with this tax liability based on current market value).

In-kind transfers allow you to keep investment positions intact, which is especially beneficial if you believe the market will rebound after a downturn. Additionally, choosing specific assets to transfer allows you to strategically manage your tax liability; this may involve selecting those with lower capital gains or losses.

Limiting distributions in the first year

You can take your initial RMD by December 31st the year after you turn 73 or—as mentioned earlier—wait until April of the following year (2026, if your 73rd birthday falls within 2025). Should you decide to wait, in this example, your second distribution would be due by December 31, 2026.

Taking two distributions in the same year can push some investors into a higher tax bracket and thus require a larger payment to Uncle Sam. For others, it may make more sense to take their first distribution as soon as possible to limit their tax liability.

In sum: understanding required minimum distributions (RMDs)

Whether retirement is on the horizon or still a few years away, related preparations involve so many unique circumstances including understanding RMDs and corresponding strategies. Fortunately, you don’t need to go it alone and can seek out help from a trusted financial advisor as you set out to navigate the path toward retirement.

Have questions about RMDs or retirement accounts? Schedule a FREE discovery call with one of our CFP® professionals so they can help!

FAQs

The government requires you pay taxes on your RMD withdrawals, but you’re free to spend or reinvest the money as you wish aside from reinvesting it in a tax-advantaged account. You can, however, potentially reinvest your RMD in a Roth IRA if you’ve earned income equal to or greater than the amount reinvested and you meet the eligibility criteria based on account income limits.
When you take your RMD, the custodian (company holding your account) will, by default, withhold 10% of the payout amount for taxes. However, you have the option to withhold either more or less or even waive withholding altogether—with these parameters ultimately depending on your own unique financial situation.
403(b) plans, offered by public schools and charities, come preloaded with the very same RMD requirements outlined in this article.

RMD Rules and How to Defer/Avoid Taxes on Them