The RMD Requirement
Pre-tax retirement accounts cannot be sheltered indefinitely. Required Minimum Distributions (RMDs) force annual withdrawals from Traditional IRAs, SEP-IRAs, SIMPLE IRAs, and most employer-sponsored plans — including traditional 401(k)s and 403(b)s — beginning at age 73 under the SECURE 2.0 Act of 2022. The age was 70½ under original law, raised to 72 by the original SECURE Act in 2019, and raised again to 73 by SECURE 2.0. Current law will raise it further to age 75 beginning in 2033.
The RMD amount for each account is calculated by dividing the prior December 31 account balance by a life expectancy factor taken from the IRS Uniform Lifetime Table. For a 73-year-old, the factor is approximately 26.5, meaning roughly 3.8% of the prior year-end balance must be withdrawn. As the account holder ages, the factor decreases and the required percentage rises. An account holder at age 85 must withdraw approximately 6.3% of the balance each year. The calculation is performed separately for each Traditional IRA, though an account holder with multiple Traditional IRAs can aggregate the total RMD and take it from any one or combination of those accounts.
The first RMD can be deferred until April 1 of the year following the year the account holder turns 73 — a one-time grace period. However, delaying the first RMD means taking two RMDs in a single calendar year (the deferred first and the second, which must be taken by December 31 of that same year). Two RMDs in one year can push income into a higher bracket and may trigger Medicare premium surcharges. Most advisors recommend taking the first RMD in the year the account holder actually turns 73, rather than deferring, to avoid the double-distribution year.
RMDs are reported as ordinary income on Form 1040 and are taxed at marginal income tax rates, just like wages or pension income. There is no special rate or preferential treatment for RMD income. This ordinary income treatment is one reason large pre-tax account balances can create substantial and surprising tax bills late in life.
Penalties and Tax Consequences
Failure to take a required RMD in the required year triggers a 25% excise tax on the amount that should have been withdrawn but was not. This penalty was reduced from 50% by SECURE 2.0 and can be further reduced to 10% if the missed RMD is corrected within two years. Even at 10%, the penalty for a missed RMD on a large balance is significant — and the income tax on the corrective withdrawal is still owed on top of the penalty.
Beyond the explicit penalty, the more practically consequential problem is the income tax interaction. Large pre-tax account balances generate large RMDs, which pile on top of Social Security income, pension income, interest income, and capital gains. Social Security benefits become up to 85% taxable once combined income crosses relatively low thresholds ($34,000 for single filers, $44,000 for married filing jointly). RMD income can push combined income well above those thresholds, causing Social Security that would otherwise be lightly taxed to become mostly taxable.
High-income retirees also face IRMAA — the Income-Related Monthly Adjustment Amount — which adds Medicare Part B and Part D premium surcharges based on income from two years prior. In 2024, IRMAA surcharges begin at modified adjusted gross income above $103,000 for single filers, with premiums rising in tiers up to incomes above $500,000. A large RMD in one year can trigger IRMAA surcharges two years later. These surcharges can add hundreds of dollars per month to Medicare costs — an indirect tax consequence of pre-tax account accumulation that many retirees do not anticipate.
The cumulative effect of decades of tax-deferred accumulation without proactive management is sometimes called the "retirement tax time bomb." A retiree who diligently maxed a Traditional 401(k) for 35 years, achieved reasonable returns, and deferred all Roth conversion opportunities may arrive at age 73 with a multi-million dollar pre-tax balance that generates RMDs exceeding their actual spending needs — creating unavoidable, high-bracket taxation on money they neither need nor want to withdraw.
Roth Conversion Strategy
The most powerful tool for managing RMD liability is Roth conversion — deliberately moving money from a pre-tax account to a Roth IRA, paying the income tax now, in exchange for eliminating future RMDs and taxes on that money. The IRS treats the converted amount as ordinary income in the year of conversion, so the timing and amount of conversions must be chosen carefully to avoid pushing income into unintended brackets or triggering IRMAA.
The ideal window for Roth conversions is typically the years between full retirement and age 73: after employment income stops, but before Social Security and RMDs begin. In these years, a retiree's taxable income may temporarily drop to a low level — particularly if they are living from non-retirement savings, a pension, or part-time work — creating space to convert pre-tax dollars at relatively low marginal rates. A couple with $60,000 in deductions and credits may be able to convert $80,000–$100,000 per year and remain in the 22% bracket, a far lower rate than the 32% they might face if forced distributions push income higher after 73.
The mathematical goal of conversion planning is to level out taxable income across years — filling lower tax brackets with intentional conversions rather than allowing the pre-tax balance to grow until forced distributions spike taxable income in the late-retirement years. This technique is sometimes called "bracket filling" or "bracket management." It requires projecting future RMDs, Social Security benefit timing, and expected spending to identify the optimal annual conversion amount. Tax planning software or a financial planner familiar with retirement distribution strategies is often valuable for this analysis.
A Roth conversion also benefits beneficiaries. Money converted to Roth during the owner's lifetime passes to heirs who can withdraw it tax-free over a 10-year window, rather than inheriting a pre-tax account and paying ordinary income tax on every dollar. For retirees with estate planning goals, Roth conversions serve a dual purpose: reducing the owner's future RMD burden while leaving a more tax-efficient inheritance.
Inherited IRAs and the 10-Year Rule
Before the SECURE Act of 2019, non-spouse beneficiaries who inherited a Traditional IRA could "stretch" distributions over their own life expectancy — a strategy called the stretch IRA. A 40-year-old who inherited an IRA could take tiny RMDs for decades, allowing the bulk of the account to continue growing tax-deferred for 40 or more years. This minimised annual taxes and maximised the total value extracted from the account over the beneficiary's lifetime.
The SECURE Act largely eliminated the stretch IRA for most beneficiaries. Most non-spouse beneficiaries who inherit a Traditional IRA from an owner who died on or after January 1, 2020 must withdraw the entire account within 10 years of the original owner's death. A limited group of "eligible designated beneficiaries" — including surviving spouses, minor children, disabled individuals, and beneficiaries less than 10 years younger than the deceased — can still use the life expectancy method. But the broad category of adult children, other relatives, and non-related beneficiaries is now subject to the 10-year rule.
The 10-year window gives flexibility on timing — beneficiaries can take no distributions for nine years and withdraw the entire balance in year 10, spread withdrawals evenly, or front-load withdrawals in low-income years. SECURE 2.0 and subsequent IRS guidance clarified that, for owners who had already begun taking RMDs before death, beneficiaries must take annual distributions in years 1 through 9 (based on the beneficiary's life expectancy) and clear the account by year 10. For owners who had not yet begun RMDs, beneficiaries have more flexibility on annual amounts within the 10-year window.
Roth IRAs inherited by non-spouse beneficiaries are also subject to the 10-year rule under the SECURE Act — but without income taxes on the withdrawals. An inherited Roth of the same dollar value as an inherited Traditional IRA is therefore far more valuable. The beneficiary of an inherited Traditional IRA owes ordinary income tax on every dollar withdrawn; the beneficiary of an inherited Roth owes nothing. This asymmetry is one of the strongest arguments for converting pre-tax accounts to Roth during the owner's lifetime — particularly when heirs are in higher tax brackets than the original owner.