3 Required Minimum Distribution (RMD) Rules Investors Must Know Before 2025

Tax-deferred retirement accounts like traditional IRAs and 401(k) plans let investors reduce their tax burden in a given year by deducting contributions from their gross income. But the tax payments cannot be postponed indefinitely. Individuals with tax-deferred accounts must take required minimum distributions (RMDs) once they reach a certain age.

Read on to learn three important RMD rules that every investor should know before 2025.

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1. RMDs apply to tax-deferred accounts like traditional IRAs and 401(k) plans

The government lets workers delayed tax payments on contributions made to certain account types, but the bill cannot be delayed forever. Required minimum distributions (RMDs) are mandatory annual withdrawals from pre-tax retirement accounts, such as those listed below:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• Traditional 401(k) plans
• Other defined contribution options like 403(b) plans and 457(b) plans

Historically, Roth 401(k) plans have been subject to RMDs rules, but that changed when Congress approved the Secure Act 2.0 in 2022. Specifically, as of 2024, the RMD rules no longer apply to Roth 401(k) account holders.

However, while Roth IRAs and Roth 401(k) plans are not subject to RMDs so long as the original owner is alive, they are subject RMDs once that person passes away and account ownership transfers to a beneficiary.

2. RMDs generally start at age 73, and late withdrawals are penalized

The Secure Act 2.0 also increased the age at which account holders must begin taking RMDs. Detailed below are the updated rules:

• Born in 1951 or later: RMDs begin at age 73.
• Born between July 1, 1949, and December 31, 1950: RMDs should have started at age 72.
• Born before July 1, 1949: RMDs should have started at age 70 and 1/2.

In most cases, RMDs must be taken by Dec. 31. The only exception is first-time RMDs may be postponed until April 1 of the following year. For example, someone that turns age 73 in 2024 must take their first RMD by April 1, 2025. They would also have to take a second RMD by December 31, 2025. And all subsequent RMDs would need to be taken by Dec. 31 in each year, too.

Individuals that don't take their RMDs on time are subject to a 25% excise tax, meaning they could owe up to one-quarter of the RMD amount. And anyone hit with an excise tax still has to take the full RMD and pay any related income taxes. However, the excise tax can be reduced to 10% if the issue is fixed within two years.

Here is an example: John turned 73 in 2024. The RMD on his traditional IRA is $10,000 this year. If John fails to withdraw that amount by April 1, 2025, he may be liable for a 25% excise tax, which means $2,500 (25% of the RMD amount). However, if John fixes the problem within two years, the penalty may be reduced to $1,000 (10% of the RMD amount). Either way, John still has to take his $10,000 RMD and pay any related income taxes.

3. RMDs are generally due at the end of each year, and they are based on account balances

RMDs are calculated based on the account balance as of Dec. 31 in the previous year. For instance, the RMD payment due on a traditional IRA in 2024 is based on the year-end account balance from 2023. Specifically, the account balance is divided by a number known as the distribution period, which varies based on age, and the quotient is the RMD in that particular year.

The chart below shows the distribution period (sometimes called the life expectancy factor) at different ages.

Data source: Internal Revenue Service.

Importantly, RMDs must be calculated for each IRA separately, but the total RMD amount can be withdrawn from a single account. In other words, individuals do not have to take separate RMDs from each IRA. But the rules are different for 401(k) plans. For those, RMD amounts must be calculated separately and withdrawn from each individual account.

Here is an example: Jane turned 73 in 2024. Her traditional IRA had a balance of $100,000 as of December 31, 2023. According to the RMD rules, Jane must withdraw $3,773.58 ($100,000 divided by 26.5) from that traditional IRA no later than April 1, 2025. Additionally, all subsequent RMDs must be completed by Dec. 31 in each year.

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