RMDs count as ordinary income on your tax return

Yes. Required Minimum Distributions (RMDs) are taxed as ordinary income in the year you receive them. The IRS treats the money you withdraw from a traditional IRA, SEP-IRA, SIMPLE IRA, or most employer retirement plans as regular taxable income — the same tax bracket as wages or salary.

The amount you withdraw is added to your other income for the year. If your RMD is $15,000 and you earned $50,000 in wages, your taxable income is $65,000 (before deductions). You pay federal income tax on the full RMD at whatever rate applies to your total income that year.

State income tax also applies in most states. A few states — including Pennsylvania, Illinois, and Mississippi — do not tax retirement income, but most do. Check your state's rules, because the tax bill can be substantial.

Key Takeaways

  • RMDs from traditional IRAs and most employer plans are taxed as ordinary income at your marginal tax rate for the year.
  • The full RMD amount is added to your other income, which can push you into a higher tax bracket.
  • You owe both federal and state income tax on RMDs unless you live in one of the few states that exempts retirement income.
  • Roth IRAs do not require distributions during the account holder's lifetime, and distributions are not taxed as income.
  • Withholding taxes from your RMD can reduce what you owe at tax time, but you must request it when you take the distribution.

Why RMDs are taxed differently from contributions

When you contributed to a traditional IRA or 401(k), you got a tax deduction — the money came out of your taxable income that year. The IRS deferred the tax, not eliminated it. An RMD is the IRS collecting that deferred tax.

The money in your account grew tax-free for years. When you withdraw it, both the original contributions (if they were deductible) and all the growth are taxed as ordinary income. This is why the tax bill on an RMD can be larger than you might expect — you are paying tax on decades of investment gains, not just the money you put in.

Roth IRAs work differently. You contributed after-tax dollars, so the growth was tax-free. Roth distributions are not taxed as income, and Roth IRAs have no RMD requirement during your lifetime. If you have both types of accounts, only the traditional account triggers an RMD.

How RMDs affect your tax bracket and other income

An RMD can push you into a higher tax bracket, which means you pay a higher rate not just on the RMD but on some of your other income too. If you are in the 22% bracket and your RMD moves you into the 24% bracket, the additional income is taxed at 24%, not 22%.

This matters because a larger RMD can also trigger other tax consequences. It may reduce or eliminate tax deductions you would otherwise claim, such as the deduction for charitable contributions or education expenses. It can increase the taxable portion of your Social Security benefits. It can raise your Medicare premiums, because Medicare uses your income from two years prior to set your Part B and Part D costs.

Some people take their RMD early in the year and use the rest of the year to plan other income to minimize the total tax hit. Others work with a tax professional to decide whether to take more than the minimum in a lower-income year to spread the tax burden across multiple years.

Withholding and estimated taxes on RMDs

When you take an RMD, you can ask the plan administrator or financial institution to withhold federal income tax. The withholding reduces the amount you receive but also reduces what you owe when you file your return. You can withhold 10%, 20%, or any other percentage you choose.

If you do not withhold enough during the year, you may owe estimated taxes. Estimated taxes are payments you make to the IRS quarterly if you have income that is not subject to withholding — like RMDs, investment income, or self-employment income. If you do not pay enough through withholding or estimated taxes, you may owe a penalty when you file.

The amount to withhold depends on your total tax situation. If an RMD is your only income, withholding 20% to 25% often covers your federal tax. If you have wages, Social Security, or other income, you may need to withhold more or less. A tax professional can calculate the right amount based on your specific situation.

RMDs from employer plans versus IRAs

The tax treatment is the same — both are taxed as ordinary income — but the rules for taking the distribution differ slightly. With an employer plan like a 401(k), you must begin RMDs by April 1 of the year after you turn 73 (as of 2023; this age has been rising under recent law changes). With an IRA, the same age applies.

If you are still working and do not own more than 5% of the company, you may be able to delay RMDs from your current employer's plan until you retire. This is called the "still-working exception." It does not apply to IRAs or to plans from previous employers. If you have multiple accounts, you must calculate the RMD for each one, though you can withdraw the total from one account if you choose.

The tax bill is the same regardless of which account the money comes from. The difference is in when you must start taking distributions and how much flexibility you have in timing.

Strategies to reduce the tax impact of RMDs

One option is a may have access to charitable distribution (QCD). If you are 70½ or older, you can direct up to $100,000 per year from your IRA directly to a may have access to charity. The distribution does not count as income on your tax return, which means it does not increase your taxable income or trigger the tax consequences described above. You cannot claim a charitable deduction for the amount, but you avoid the tax entirely.

Another approach is to bunch charitable giving. If you give to charity some years and not others, you might take a larger RMD in a high-income year and donate it to charity, then take a smaller RMD in a low-income year. This can lower your average tax rate across multiple years.

Some people use RMDs to fund a Roth conversion — withdrawing from a traditional IRA and immediately depositing the same amount into a Roth IRA. This is taxable in the year of conversion, but future growth in the Roth is tax-free and Roth distributions are not taxed. This strategy works best if you expect to be in a higher tax bracket later or if you want to reduce future RMDs.

Frequently Asked Questions

Do I have to pay state income tax on my RMD?

Most states tax RMDs as ordinary income. A few states — Pennsylvania, Illinois, Mississippi, and a handful of others — do not tax retirement income. Check your state's tax rules. If you moved to a no-tax state after retiring, you may not owe state tax on new RMDs, but rules vary by state and by when you moved.

What happens if I do not take my RMD?

The IRS charges a penalty of 25% of the amount you should have withdrawn but did not (as of 2023; this rate may change). If you miss an RMD by a lot, the penalty can be thousands of dollars. If you miss it by a small amount and correct it quickly, you may be able to request a waiver. Report the missed RMD on your tax return and file Form 5329 to request penalty relief.

Are RMDs from a 401(k) taxed differently than RMDs from an IRA?

No. Both are taxed as ordinary income at your marginal tax rate. The only difference is when you must start taking them and whether the still-working exception applies. The tax treatment is identical.

Can I avoid paying tax on an RMD by donating it to charity?

If you use a may have access to charitable distribution, yes — the money goes directly from your IRA to the charity and does not count as income. You must be 70½ or older and the charity must be may have access to. If you withdraw the money first and then donate it, you still owe tax on the withdrawal.

Does my RMD count toward my income for Medicare premium purposes?

Yes. Medicare uses your income from two years prior to set your Part B and Part D premiums. A large RMD can increase your premiums. If your income drops significantly in the current year, you can notify Medicare and request a recalculation based on current income.