Required minimum distribution (RMD) and QCD planning

A required minimum distribution is the smallest amount the tax code makes you withdraw from most tax-deferred retirement accounts each year once you reach a set age. The accounts under this rule include traditional IRAs along with the employer versions such as SEP and SIMPLE plans. Workplace plans such as a 401(k) or a 403(b) fall under it as well. A Roth IRA held by the person who opened it has no lifetime withdrawal requirement, and that gap is one reason Roth conversions draw so much attention in the years before this age arrives. The rule has a plain purpose. You either deducted the contributions or set aside pretax wages long ago, so the government finally wants the tax it agreed to postpone. The starting age today is 73 for anyone who turned 72 after 2022, a change written into the SECURE 2.0 Act of 2022, and that age rises again to 75 in 2033. The IRS lays out the details for owners and heirs in Publication 590-B, and every payment reaches you on a Form 1099-R that the custodian also files with the government.

The first year carries a wrinkle that surprises many new retirees. You may hold off on that very first withdrawal until April 1 of the year after you turn 73, a date the rules name the required beginning date. Every deadline after that one falls on December 31. The delay is not free. Suppose you turn 73 in 2026 and slide the first payment into March of 2027. You then report two withdrawals during 2027, the postponed 2026 amount of about 18,000 dollars and the regular 2027 amount of about 19,000 dollars, so roughly 37,000 dollars of taxable income piles onto one return. That pile can push you into a higher bracket and lift your Medicare Part B premium two years later, because Medicare looks back at your income from that year. The common mistake is reading the grace period as a bonus instead of a timing decision that carries a real cost.

The mix of accounts you hold and the year you actually retire both move the answer, so this is planning work rather than one fixed figure. A worker who stays on the job past 73 and owns no more than 5 percent of the company can sometimes defer withdrawals from that current employer plan, though the break never reaches an IRA. The Reed Corporation is a CPA and tax firm, not a registered investment adviser, so we handle the tax treatment and the timing and coordinate with whoever manages your portfolio. We map the full account picture through our tax strategy consulting work and carry the results into your individual tax return preparation, while Publication 590-A fills in the contribution history behind these balances.

A little math up front changes the whole year. If you know the withdrawal is coming, you can have tax withheld straight from the distribution and treat it as paid evenly across the months, which softens any underpayment problem. You can also decide whether to give some of the money to charity before it ever counts as income, a move covered later on this page. Couples often overlook that each spouse handles their own accounts under their own age, so the timing for two people rarely lines up on the same date. Look at all of this in spring rather than the final week of December, and you keep room to adjust before the deadline closes.

One more piece helps first-timers. A designated Roth account inside a workplace plan no longer forces lifetime withdrawals after a 2024 change in the SECURE 2.0 Act, so those dollars can sit untouched like a Roth IRA. Any tax you have withheld from a withdrawal is treated as paid across the whole year, which can rescue someone who notices in December that quarterly estimates fell short. We would rather build the plan in spring, though the rules do leave a repair path for a late realization. Treat this first year as the moment to set a simple annual routine, because the same deadline returns every December for the rest of your life.

The math behind a required minimum distribution is a simple division problem, though gathering the right inputs takes some care. You begin with the account balance as of December 31 of the prior year. You then divide that balance by a life expectancy factor, called the distribution period, that the IRS publishes in Publication 590-B. Most owners use the Uniform Lifetime Table. A married owner whose only beneficiary is a spouse more than ten years younger uses the Joint and Last Survivor Table instead, and it yields a smaller yearly withdrawal. A person who inherited an account uses the Single Life Table. The factor falls a little each year as you grow older, so the slice of the account you must take gradually rises over time. None of these tables asks about your current balance, only the balance at the end of last year.

A worked example makes it concrete. Say your traditional IRA held 500,000 dollars at the close of last year and you are 73 this year. The Uniform Lifetime Table factor at 73 is 26.5. Divide 500,000 dollars by 26.5 and you get about 18,868 dollars, which is the amount you must take by December 31. At 80 the factor drops to 20.2, so the same 500,000 dollars balance would force a withdrawal near 24,752 dollars. Notice the balance that matters is last year ending figure, not today value, so a market swing during the year does not change the number you owe. The common mistake is using the current balance or the wrong table, which quietly understates the withdrawal and sets up a penalty.

Getting the prior year balance right depends on clean records, especially if you rolled money between custodians or hold more than one account. This is where careful record work earns its keep, and our bookkeeping team helps clients hold the year-end statements that feed the calculation. Employer plans add a step. A 401(k) or 403(b) uses the same tables, but the plan administrator often runs the number for you, and Publication 560 describes how these employer plans handle the rules. Every distribution then shows up on a Form 1099-R, and the code in box 7 tells the IRS what kind of payment it was.

Two details save clients from trouble later. First, if you own several traditional IRAs, you figure the withdrawal for each one separately even though you may pool the actual payment, a point covered in the aggregation question below. Second, the factor can change the year your marital status shifts, since your beneficiary setup can move you to a different table. We fold the calculation into a client tax plan so the withdrawal and its withholding get set against the right bracket at once. Run the numbers early and you can still shift a Roth conversion or a charitable gift before the year locks, which puts you in control of the tax rather than reacting to it.

Two technical points catch people who do their own math. In the first year you use the factor for the age you reach during that year, not your age on January 1, so a birthday late in the year still counts. For an inherited account under the older stretch method, you do not look up a fresh factor annually. You set the factor once and subtract one from it each year, a mechanic the Single Life Table assumes. You also add back certain amounts to the prior year balance, such as a rollover that left one custodian in late December and had not yet reached the other by the 31st. Skipping that add-back understates the balance and the withdrawal. We reconcile these figures so the number you report matches what the custodian reports.

Missing a required minimum distribution used to carry one of the harshest penalties in the tax code, and it still stings. For decades the excise tax was 50 percent of the amount you failed to take. The SECURE 2.0 Act of 2022 cut that to 25 percent, and it drops further to 10 percent if you fix the shortfall within a short correction window, generally by the end of the second year after the miss and before the IRS contacts you. Publication 590-B walks through how the tax applies and how the correction works. The tax falls on the shortfall, meaning the part of the withdrawal you should have taken but did not. It reaches IRAs and employer plans alike.

A worked example shows the stakes. Say your withdrawal for the year was 20,000 dollars and you took nothing. Under the old rule the penalty was 10,000 dollars. Under the current 25 percent rate it is 5,000 dollars, and if you catch it quickly and pull the money out, the rate can fall to 10 percent, or 2,000 dollars. You report the missed amount and figure the tax on Form 5329, which attaches to your return. The common mistake is staying quiet and hoping no one notices. The custodian already reported your account balance and your distributions on a Form 1099-R history, so a gap is easy for the IRS to spot.

The relief valve is a waiver request. If the miss came from a reasonable error and you are taking steps to fix it, you can ask the IRS to waive the excise tax. You do this by taking the overdue withdrawal as soon as you can, then filing Form 5329 with a short statement of what went wrong and how you corrected it. There is no guaranteed outcome, but the IRS has a long record of granting these waivers when the taxpayer acts in good faith and moves fast. We prepare the form and the explanation as part of a client individual tax return preparation, so the request lands with the right support behind it.

The waiver mechanics are worth knowing in plain terms. You take the overdue amount out first, then you complete the part of Form 5329 that figures the excise tax, but you write the letters RC and the amount you want waived beside it and reduce the tax you actually pay. You attach a short signed note describing the reasonable cause, such as a serious illness or a custodian that failed to send the payment it promised. You do not have to pay the penalty first and then chase a refund later. The IRS reviews the request and, in most good-faith cases, accepts it. Keep proof of the cause and proof that you fixed the shortfall, because the file you build now is what supports the request.

Prevention beats any waiver. Many custodians will send the withdrawal automatically each year once you set that up, and a calendar reminder in November leaves time to act if you would rather choose the amount and the source yourself. Clients with several accounts trip most often, because it is easy to satisfy one account and forget another. We watch the whole set inside a client tax strategy consulting plan and confirm each withdrawal before the year ends. Build the reminder now and a missed deadline becomes a problem you never have to argue about later.

Whether you can pool withdrawals depends on the kind of account, and mixing them up is a frequent and costly slip. If you own several traditional IRAs, you figure the required minimum distribution for each one, then you may take the combined total from any single IRA or any blend of them. The IRS explains this pooling in Publication 590-B. The same freedom applies within 403(b) contracts, which aggregate among themselves, and Publication 571 covers those tax-sheltered annuity plans. The pooling rule is a convenience, not a loophole, so it only reaches accounts of the same family.

Employer plans are stricter. A 401(k) stands on its own, so each 401(k) must pay its own withdrawal and you cannot cover it from an IRA or from another 401(k). Publication 560 describes how these employer plans treat the rule. Here is a worked example of the common mistake. Suppose you owe 8,000 dollars from an IRA and 12,000 dollars from an old 401(k). You take the full 20,000 dollars from the IRA and assume you are finished. The 401(k) is still short by 12,000 dollars, which can draw a penalty of 3,000 dollars at the 25 percent rate. Pool only what the rules allow you to pool, and treat each employer plan as a separate obligation.

Inherited accounts follow a separate and newer track. Under the SECURE Act, most people who inherited a retirement account after 2019 must empty it by December 31 of the tenth year after the owner died, a shift away from the old lifetime stretch. Some heirs still stretch. A surviving spouse is one. A minor child of the owner is another, as is a person who is disabled or chronically ill, or someone not more than ten years younger than the owner. If the owner had already reached the required beginning date, the final rules also call for a withdrawal in each of years one through nine, then the full drain by year ten. You cannot pool an inherited account with your own.

The kind of dollars inside the account changes the picture too. Starting in 2024, a designated Roth account inside a 401(k) or 403(b) no longer requires withdrawals during the owner life, which lines it up with the Roth IRA that never did. A surviving spouse also has a choice a non-spouse does not. A widow or widower can roll the inherited money into their own IRA and treat it as their own, which restarts the clock under their own age rather than the ten-year rule. An inherited Roth IRA still has to empty within ten years for most heirs, but those withdrawals usually come out tax-free, so there the ten-year rule is about timing rather than a tax bill. We sort out which path fits before any account is retitled, since a retitling can be hard to reverse.

This is where coordination pays off, since a widow or widower may hold an inherited IRA at the same time as their own IRAs and an old workplace plan. The Reed Corporation is a CPA and tax firm rather than an investment manager, so we focus on the tax treatment and the order of withdrawals and work alongside the advisor who handles the investments. We track each withdrawal across the whole set through our tax strategy consulting work and reconcile it on the individual tax return. Map the inheritance timeline early and the ten-year clock becomes a plan rather than a scramble in year ten.

A qualified charitable distribution, or QCD, lets you send money straight from an IRA to a charity and count it toward your required minimum distribution without the amount ever landing in your taxable income. You must be at least 70 and a half, an age that did not move up when the withdrawal age rose to 73. The gift has to go directly from the IRA custodian to a qualified public charity, not to a donor-advised fund or a private foundation. Publication 590-B spells out the conditions. The yearly cap is 100,000 dollars, an amount now adjusted upward for inflation each year.

The tax result is better than a normal charitable deduction, and a worked example shows why. Say your withdrawal for the year is 18,000 dollars and you direct 10,000 dollars of it to your church through a QCD. Only 8,000 dollars shows up as taxable income, and the 10,000 dollars never enters your adjusted gross income at all. Because it is an exclusion rather than a deduction, it helps even if you claim the standard deduction and never itemize. Keeping that income out of the total can also lower how much of your Social Security is taxed and can hold you under a Medicare surcharge tier.

There is a link to the 3.8 percent Net Investment Income Tax as well. An IRA withdrawal is not itself investment income, but it lifts your modified adjusted gross income, which can drag other investment income over the threshold that triggers the tax on Form 8960. By steering part of the withdrawal to charity, a QCD can keep that total lower. The common mistake is taking the cash first and then writing a personal check to the charity. That sequence pulls the full distribution into income and only helps if you itemize, which erases most of the benefit. A QCD from a 401(k) is not allowed, so a rollover to an IRA has to come first.

A few finer points make the gift work. The charity has to give you a written acknowledgment, the same kind you would want for any donation, and the money must be a distribution that would otherwise be taxable to you. On your Form 1040 you show the full IRA distribution and then the smaller taxable part after subtracting the gift, with the note QCD written beside it. There is also a one-time election to send up to 50,000 dollars, an amount now indexed, through a charitable gift annuity or a charitable remainder trust, which suits a donor who wants an income stream back. That one-time move carries its own rules and is easy to get wrong, so it deserves a careful review. Done right, a QCD can cover the whole amount you owe for the year and trim your income at the same time.

This is planning that rewards an early start, since the transfer has to clear by December 31 to count for the year. Keep the custodian confirmation and the charity acknowledgment with your records, and Publication 590-A is a useful companion for the contribution side of these accounts. We coordinate the gift and the filing through your individual tax return preparation and a broader tax strategy consulting plan. If you want to line up a gift with the rest of your retirement picture, you can request a consultation with our team. Set the transfer in motion by autumn and everything settles well before the deadline.