There comes a year when the IRS stops waiting for you to take money out of a traditional 401(k) or IRA and starts requiring it. Miss a required minimum distribution and a 50% excise tax applies to the shortfall, the amount you should have withdrawn and didn't.
Contributions that went in untaxed don't stay untaxed; every dollar eventually comes out as ordinary income, on a schedule the calendar sets rather than the account holder.
Pre-Tax Money Gets Taxed on the Way Out
A traditional 401(k) or IRA gives you a deduction on the way in and tax-free growth along the way. What it doesn't give you is a permanent exemption. Every dollar you pull out later counts as income, taxed at ordinary rates in the year you withdraw it.
So a large balance cuts both ways. Years of contributions plus an employer match build a bigger nest egg, and they build a bigger future tax liability at the same time.
Someone who never thought of themselves as a high earner can land in retirement with an account big enough to generate sizable taxable income whether they want the money that year or not.
The First RMD Deadline Falls April 1 After You Turn 73
A required minimum distribution, or RMD, is the smallest amount you have to take out of the account each year. The starting deadline is April 1 of the year after you turn 73.
The amount isn't fixed. It's recalculated each year from two inputs, your account balance and your age, so as balances change, the required figure changes with them.
One wrinkle catches people out. Waiting until that April 1 deadline for the first distribution can mean taking two RMDs inside the same calendar year: the delayed first one and the one due for the current year.
Both land on the same tax return, and stacked income affects more than the tax bracket alone, since figures like Medicare premium tiers read off that same return.
The Accounts on the RMD List
Most workplace retirement plans are on it. The IRS names:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) plans
- 403(b) plans
- 457(b) plans
- Profit-sharing plans
- Other defined contribution plans
- Roth IRA beneficiaries
That last line matters. With a Roth IRA, it's the beneficiaries, not the original account holder, who are liable for withdrawals.
Roth Conversions End Future RMDs but Trigger Tax Now
Converting pre-tax retirement money to a Roth IRA changes when the tax gets paid rather than whether it gets paid. You owe the tax at conversion, and in exchange the money grows and comes out tax-free afterward. Roth IRAs also drop out of the RMD picture entirely for the original owner.
Because the conversion itself is a taxable event, converting a large balance all at once can produce an unusually high income year. Spreading conversions across several years is the common way to blunt that.
Whether it makes sense at all depends on current versus expected future tax rates, and that's the kind of question a tax professional or financial advisor can model against your own numbers.
Qualified Charitable Distributions, Capped at $100,000 a Year
If you're 73 or older and hold a traditional IRA, a qualified charitable distribution (QCD) lets you send up to $100,000 a year directly to charity, tax-free. The distribution counts toward your RMD.
The appeal is the routing. The money moves from the IRA to the charity without passing through your taxable income first, so it satisfies the required withdrawal without inflating the income figure your return reports.
One condition: the transfer has to go directly to the charity. Taking the cash yourself and writing a check afterward is a different transaction with a different tax result.
Working Past 73 Delays RMDs From the Current Plan Only
If you're still employed, you generally don't have to take RMDs from your current employer's retirement plan while you're working there. The exemption is narrow, though. It doesn't reach IRAs, and it doesn't reach plans left behind at former employers.
Picture someone who works into their mid-70s at one company while holding a 401(k) from a job they left a decade ago. The active plan can sit untouched. The old one can't; that balance is still on the RMD clock.
Working longer also lets someone hold off on claiming Social Security, and delaying a claim increases the eventual benefit amount.
Withdrawals After Age 59½ Can Shrink Later RMDs
A distribution taken before age 59½ generally carries a 10% early-withdrawal penalty on top of the ordinary income tax. At 59½, that penalty no longer applies.
After that point, voluntary withdrawals become a way to draw the balance down before RMDs ever start, which reduces the required amounts later. The trade-off is real: you're paying tax on that money sooner and giving up the tax-deferred growth it would have earned.
Health Savings Accounts Have No Required Withdrawals
A health savings account, available with an eligible high-deductible health plan, never triggers a required withdrawal. Nothing has to come out in any particular year, at any age.
Money that pays a qualified medical expense comes out untaxed; after 65, a withdrawal for anything else is taxed as ordinary income, the same treatment a traditional retirement account gets, minus the schedule.
On the way in, contributions up to the annual limit come off your taxable income, and whatever the balance earns compounds untaxed in the meantime.
Taxable Brokerage Accounts Run on Capital Gains Rates
For money beyond what tax-advantaged accounts can hold, a regular brokerage account has no RMDs and no contribution ceiling.
Its income is taxable, but the bill comes due when something is sold rather than when a birthday arrives, which leaves the timing with the account holder.
A portfolio that rarely turns over produces few taxable events in the first place, and broad ETFs and index funds tend to turn over less than heavily traded alternatives.
When a sale does happen, an investment held longer than a year qualifies for long-term capital gains rates, which run from 0% to 20%.
Municipal bonds sit outside that pattern. The interest they pay is generally free of federal, state, and local tax, so none of the yield is skimmed off before it reaches the holder, and the higher the tax rate on that holder's other income, the more the exemption is worth.
How the Rules Land on One Taxpayer's Accounts
Go back to the person working into their mid-70s with an old 401(k), and give them a traditional IRA as well. Three accounts, three answers. The current employer's plan is exempt while they stay on the payroll.
The old 401(k) isn't, and neither is the IRA. A QCD can cover the IRA's required amount without adding a dollar to reported income, but the QCD rule applies to IRAs, so the old 401(k) still has to pay out as taxable income.
And if that first distribution was pushed to the April 1 deadline, two required amounts hit one return, the same return Medicare reads.
The two moves that shrink RMDs, a Roth conversion and voluntary withdrawals after 59½, are only useful to that person earlier, before the required distributions start drawing the balance down anyway.
An HSA and a taxable brokerage account never join the schedule at all. And the Roth exemption stops with the original owner: whoever inherits the account is the one who has to take the withdrawals.
