Required Minimum Distributions (RMDs): What They Are, How They Work, and How We Plan Around Them
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RMDs at a glance:
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At Open Window, we view RMDs as more than a tax rule to comply with. Each year’s required distribution is an opportunity to coordinate taxes, cash flow, charitable intent, and long-term planning. The goal is not just to take the correct amount, but to take it in the most thoughtful way possible.
What Is a Required Minimum Distribution (RMD)?
The IRS requires a minimum annual withdrawal once you reach a certain age, or if you inherit someone else's retirement account.
You may see this requirement referred to as a Required Minimum Distribution (RMD) or a Minimum Required Distribution (MRD). These terms mean the same thing.
RMDs generally apply at a certain age or in certain situations to:
- Traditional IRAs
- SEP and SIMPLE IRAs
- Most 401(k) plans
- Inherited retirement accounts
Below, we explain why RMDs exist, how they are calculated, and how we think about them strategically at Open Window.
Why does the IRS require minimum distributions?
Retirement accounts such as traditional IRAs and 401(k)s are designed to grow tax deferred, meaning without current taxation. For many households, this tax deferral lasts decades.
Eventually, the IRS requires that those deferred taxes be paid. To accomplish this, it mandates that money begin moving out of certain retirement accounts and back into the taxable system.
Each year, you are required to withdraw at least a minimum amount and pay the associated income taxes. This required withdrawal is your RMD.
Most people take RMDs once they reach a specific age set by law.
For decades, the starting age for RMDs was age 70½. In 2019, the SECURE Act postponed required distributions until age 72, but only for certain individuals. The SECURE Act 2.0, passed in 2022, further adjusted the starting age, increasing it to 73 beginning in 2025 for individuals born on or after January 1, 1951, and before January 1, 1960.
The starting age for RMDs will increase again to age 75 in 2033 for those born on or after January 1, 1960.
RMD starting age depends on your birth year:
If you are unsure which starting age applies to you, reach out to us. This is something we review and confirm with every client.
How Required Minimum Distributions Are Calculated
Each year’s RMD follows a straightforward but precise formula:
- Confirm the December 31 balance of each applicable retirement account from the prior year.
Example: $500,000 - Divide that balance by your "IRS life expectancy" factor.
Example: 26.5 at age 73 - The result is your required withdrawal (RMD) for the current year.
Example: $18,867.92 ($500,000 ÷ 26.5)
This process repeats every calendar year using updated account balances and age-based factors.
You can always withdraw more than the required amount. However, withdrawing less triggers one of the harshest penalties in the tax code: 25% of the shortfall, plus the income taxes owed.
To ensure our clients never pay this penalty and to help them use RMDs intentionally, we work with each client to create and implement a strategy for taking their RMD fully each year.
Note: Required distributions from IRAs can be aggregated and taken from one or more IRAs. Required distributions from 401(k) plans must be taken separately from each plan.
What Is the IRS Life Expectancy Factor?
The IRS publishes a standardized table assigning a life expectancy factor based solely on age. The table does not consider personal health, longevity, or family history.
While imperfect, this standardized approach creates consistency across taxpayers and simplifies administration.
Online calculators can be helpful in estimating RMDs. For example, some individuals find useful this RMD calculator published by AARP.
Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.
The “Still Working” Exception for Some 401(k) Plans
In limited situations, individuals who continue working past the RMD age may delay RMDs from a current employer’s 401(k) plan until retirement.
This exception applies only to certain employer-sponsored plans. It does not apply to IRAs or old employer plans and is not available to business owners who own 5% or more of the sponsoring company. Because the rules are narrow and mistakes can be costly, this exception should always be reviewed carefully.
What If You Do Not Need the RMD Income?
The IRS requires that money come out of pre-tax retirement accounts and that taxes be paid. What you do with the funds afterward is entirely your decision.
What you cannot do is put the RMD back into another retirement account. RMDs cannot be rolled over, recontributed, or converted to a Roth IRA. Any Roth conversion must occur in addition to, not instead of, the RMD.
Many clients reinvest RMDs in taxable accounts, use them to support cash spending andother lifestyle goals, or integrate them into charitable giving plans.
Charitable giving with RMDs: Qualified Charitable Distributions (QCDs)
For charitably inclined households, a Qualified Charitable Distribution (QCD) can be one of the most tax-efficient uses of an RMD.
When structured properly, a QCD satisfies your RMD while excluding the distributed amount from your taxable income.
In 2026, the inflation-adjusted QCD limit is $111,000 per individual.
Other important QCD rules:
- QCDs are available starting at age 70.5 (even if you don't yet have an RMD)
- QCDs are most effective once RMDs apply
- QCDs are only available from IRAs and inherited IRAs, not from 401(k) plans
- QCD funds must go directly from your IRA to the qualified charity
Timing is critical. If funds are withdrawn for personal use before completing the QCD, the QCD opportunity is lost until the next calendar year.
How we approach RMD planning
RMDs are often viewed as a compliance requirement, but they can also serve as an annual planning opportunity that intersects with tax strategy, charitable intent, investment positioning, and long-term intentions.
Whether we are proactively taking your RMD or intentionally waiting for strategic reasons, our focus is accuracy, coordination, and alignment with your broader financial plan.
If you have questions or want to explore planning opportunities around RMDs, we invite you to reach out. Call the office, send the Open Window team a quick note at www.openwindow.com/quicknote, or schedule a time to talk with Eric at www.openwindow.com/connection.