Required Minimum Distributions and Taxes
The IRS Eventually Wants Its Share
Money in a traditional IRA or 401(k) generally hasn’t been taxed yet. At a certain age, the IRS requires you to start taking it out each year, whether you need it or not. That’s a required minimum distribution, or RMD, and it’s generally taxed as income.
The Basics
- When they start. Currently at age 73 or 75, depending on the year you were born. If you’re still working, a current employer’s plan may let you wait until you retire, unless you own 5% of the business. IRAs don’t.
- What they apply to. Most traditional retirement accounts, including annuities held inside an IRA. Original owners of Roth IRAs don’t have to take them.
- How much. Generally based on your account balance and your age, using IRS tables.
- What a missed one costs. A penalty of 25% of the amount you should have taken, which can drop to 10% if you correct it in time.
If you have several accounts, the rules for how to take them can differ, so don’t assume one withdrawal covers everything. Rules also change, so check the IRS’s RMD page or ask your tax professional what applies to you.
Why Plan Before You Have To
A large RMD can push up your income in a year you didn’t expect, and the time to think about it is before it starts. That’s why I start with education, and why your CPA should be part of the conversation.
Where Insurance Products Fit
Annuities and life insurance are taxed differently from a retirement account, and that can matter in a plan. An annuity outside a retirement account generally isn’t subject to RMDs, though its gains are taxed as income when you take them out. Whether any of this helps depends on your own numbers.
I'm not a tax professional, and this page is general information, not tax advice. Talk to a CPA or other tax professional about your own situation.
Frequently Asked Questions
What is a required minimum distribution?
It's the amount the IRS requires you to withdraw each year from most retirement accounts once you reach a certain age, currently 73 or 75 depending on the year you were born. It's generally taxed as income. Original owners of Roth IRAs don't have to take them. Missing one can bring a penalty of 25% of the amount you should have taken, which can drop to 10% if you fix it in time.
Learn about RMDs and taxes →Do you give tax advice?
No. I can explain in general terms how life insurance and annuities are taxed, and I'll coordinate with your CPA so your tax professional sees the full picture. The advice on your own return should come from that person. If a decision has a tax consequence, ask your CPA before you make it.
Learn about RMDs and taxes →What is an annuity?
An annuity is a contract you make with an insurance company. You pay in, either a lump sum or over time. The money generally grows tax‑deferred, and the company can turn it into income later, including income for life if you choose that option. Guarantees depend on the financial strength and claims‑paying ability of the company. Most annuities charge you for taking out too much too early, so money you may need soon usually doesn't belong in one.
Learn how annuities work →