Required Minimum Distributions, or RMDs, are the eventual price Uncle Sam exacts from each of us for the multi-year tax-deferral privilege they granted us during our working lives. For years, Retirement Account (Traditional IRA, 401(k), etc.) withdrawals were mandated to begin in the year the account owner reaches age 70-1/2. In 2018, his unwieldy number was thankfully replaced by (and increased to) 73 for people born between 1951 and 1959. In 2025, the RMD age became 75 for those born in 1960 or later. These changes reflect increasing life expectancies and the need to preserve retirement assets over a longer retirement.

For the year in which an account owner achieves RMD age, there is a 1-time withdrawal exception allowed. The first RMD can be delayed until the first quarter of the following year, which is generally used by people who are retiring in their RMD birthday year. This allows taxable RMD income to be deferred until the year following retirement, when working income terminates or is reduced.

The timing of the RMD distribution date should consider the account owner’s need for income. Most people delay the annual RMD as long as possible, thereby allowing more time for tax-free growth throughout the year. For owners who don’t need the income and would prefer to withdraw smaller accounts, it may be smarter to take the distribution early in the year. This action intentionally reduces further appreciation of the RMD funds, consequently reducing the next year’s RMD.

Most RMDs are paid in cash, and many apply Federal Tax withholding to cover the added income from the RMD. However, it is perfectly acceptable to distribute shares of stocks, ETFs, or Mutual Funds. Taxes can be paid from another source or through a separate distribution of cash.

Assets distributed as an RMD must be distributed to a taxable account, and are taxed as ordinary income in the year they are rolled out of the Retirement Account. These assets receive a step-up in basis. Whenever the taxpayer sells those assets, gain or loss will be calculated using the price received, less the new basis. Appreciated assets held for over a year will be taxed at favorable Capital Gains rates (some exceptions apply). Gains taken in less than one year are taxed as ordinary income. Losses on asset sales work the same way, depending on the holding period, with the same one-year holding period rules.

Failure to take any Required Minimum Distribution results in a serious financial penalty. RMDs are not eligible for Roth Conversion, as they would be classified as excess contributions. RMDs are required to be completed prior to the owner performing any Roth Conversion from the affected account.