The ABCs of RMDs and QCDs

The federal government encourages individuals to  save for retirement by providing tax incentives for those who make contributions to personal retirement accounts. The goal is to help people achieve financial independence in retirement and lessen the burden on public assistance programs for older Americans.

The government offers these tax incentives as a trade-off, foregoing tax revenue today in exchange for a more financially secure populace in the future. At the same time, the government wants to prevent retirement savings from being tax-deferred indefinitely, so they have built in guarantees that these accounts will be taxed eventually. 

What is an RMD?

When Congress created the individual retirement account in 1974, it also established a requirement for account holders to make withdrawals on an annual basis once they reached a certain age.  A required minimum distribution (RMD) is the minimum amount a person must withdraw every year from their tax-deferred retirement accounts once they reach a certain age.

What is the RMD starting age?

The RMD rules enacted in 1974 mandated account withdrawals starting at age 70 1/2. Subsequent legislation has increased the RMD starting age. Here’s a summary:

Born before July 1, 1949	RMDs started at age 70 ½
Born July 1, 1949 to December 31, 1950	RMD age is 72
Born January 1, 1951 to December 31, 1959	RMD age is 73
Born after January 1, 1960	RMD age is 75

 
In general, RMDs start the year you reach the RMD age, with the first distribution due April 1 of the following year, and all others by December 31. For example, taxpayers turning 73 in 2025 would need to take their 2025 RMD by April 1, 2026 and would have to take their 2026 RMD by December 31, 2026.

You can delay RMDs from a workplace plan like a 401(k) until you retire unless you own 5% or more of the company.

What accounts are subject to the RMD rules?

Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and some other employer plans are subject to the RMD rules. You are not required to take withdrawals from Roth IRAs, or from Designated Roth accounts in a 401(k) or 403(b) plan while the account owner is alive. However, beneficiaries of Roth IRAs or Designated Roth accounts are subject to the RMD rules.

How do I calculate my RMD amount?

The RMD amount is calculated based on your prior year-end account balance divided by a factor from an IRS life expectancy table. Thankfully, the trustee or  custodian of an IRA must either report the amount of the RMD to you or offer to calculate it for you by January 31 of the year in which the minimum distribution is required. This report can be provided with the year-end fair market value statement that you normally get each year so remember to check that statement when it arrives. No report is required for section 403(b) contracts (generally tax-sheltered annuities) or for IRAs of owners who have died. There are many RMD calculators available online if you want a good estimate.

What if I have more than one retirement account?

If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA.

You may withdraw your annual RMD in any number of distributions throughout the year, as long as you withdraw the total annual minimum amount by December 31 (or April 1 if it is for your first RMD).

How is my RMD income taxed?

RMD funds are taxed as ordinary income. The tax rate will depend on the amount of other taxable income you have for the year. Generally, you will pay tax at your personal federal income tax rate.

What happens if I don’t take an RMD?

Don’t forget to take your RMD! The penalties for failing to take the RMD are steep. If the distributions to you in any year are less than the RMD for that year, the amount not withdrawn is subject to a 25% excise tax. The penalty may be reduced to 10% if the owner corrects the error within two years.

If the failure to take the proper RMD was due to a reasonable error, you can ask the IRS to fully waive the penalty.

There is no issue if you take out more than your RMD other than increasing your taxable income.

Can I make a charitable donation from my IRA?

You can donate up to $108,000 of your 2025 RMD to qualified charities and exclude the donated amount from your taxable income. (The maximum amount you can donate is indexed for inflation, so check what the amount is for each year after 2025.)  The requirements for a qualified charitable distribution (QCD) include:

• The QCD must be made after the date you attained age 70 ½ (lower than the RMD age).
• The donation must be made directly from your retirement account to the charitable organization.
• The donation can be made from an IRA but not from employer-sponsored plans like 401(k)s or 403(b)s.
•  The donation must go to  qualified 501(c)(3) public charities, including churches. Private foundations and donor-advised funds are not qualifying charities for purposes of the QCD.
• You cannot both exclude the QCD from taxable income and take a charitable contribution deduction for the amounts donated.

The rules governing RMDs and QCDs are numerous and complex, and we’ve covered only a few of them in this overview. If you have questions about how the rules might apply to your individual circumstances, give one of our tax professionals a call. We would be happy to help!