RMDs count as ordinary income on your tax return

Yes, required minimum distributions (RMDs) are taxed as ordinary income in the year you withdraw them. The IRS treats the money you take out of a traditional IRA or 401(k) the same way it treats wages or salary — it goes on your tax return at your ordinary income tax rate, which depends on your tax bracket that year.

The amount you withdraw is added to all your other income sources. If you have a pension, Social Security, investment income, or a job, those all stack together. Your total income for the year determines which tax bracket you fall into and how much you owe in federal income tax.

This is different from how the money was treated when you first put it in. Money you contributed to a traditional IRA or 401(k) often reduced your taxable income in that year. RMDs are the flip side: you deferred the tax then, and now you pay it.

Key Takeaways

  • RMDs from traditional IRAs and 401(k)s are taxed as ordinary income at your regular tax rate, not at a special capital gains rate.
  • The RMD amount is added to your other income for the year, which may push you into a higher tax bracket.
  • You owe federal income tax on the full RMD amount, even if you don't spend the money and reinvest it.
  • State income tax may also explore to RMDs, depending on where you live and which state has taxing rights.
  • Roth IRAs have no RMDs during the account owner's lifetime, so withdrawals are not taxed as ordinary income.

When the RMD is added to your income

The RMD counts as income in the tax year you actually receive it, not in the year the distribution was supposed to happen. If you take your RMD in December, that's the year it's taxed. If you wait until January, it's taxed in the new year.

Your financial institution will send you a Form 1099-R in January showing the amount you withdrew. That form goes to the IRS and to you. You report the RMD on your tax return, usually on Form 1040, and it becomes part of your total income for that year.

The timing matters because taking an RMD in a year when you have other large income — like from selling a house or cashing out stock options — can push you into a higher tax bracket than if you'd taken it in a quieter year. Some people try to manage this by taking RMDs in years when their other income is lower.

How RMDs affect your tax bracket

Because RMDs are added to your other income, they can bump you into a higher tax bracket. If you earn $50,000 from a job and take a $30,000 RMD, your taxable income is $80,000 for the year. That higher total determines your tax rate.

This effect can be especially sharp if you have other income sources. For example, if you receive Social Security, a large RMD can cause more of your Social Security to become taxable — a rule that catches many people off guard. The IRS uses a formula that looks at your combined income from multiple sources.

You cannot avoid the tax by not spending the RMD money. Even if you withdraw it and when ready reinvest it in a taxable brokerage account, you still owe income tax on the full amount in the year you took it out.

State income tax on RMDs

Most states that have an income tax will also tax your RMD as ordinary income. The state tax is separate from federal tax and is calculated on top of it. A few states — including Pennsylvania, Illinois, and Mississippi — do not tax retirement income, including RMDs, but most do.

Which state taxes your RMD depends on where you live and where the account is held. Generally, your state of residence taxes the income. If you move to a different state after you retire, you may owe tax to your new state on RMDs you receive there.

Some states have special rules for military pensions or teacher pensions but treat IRA and 401(k) distributions like ordinary income. Check your state's tax website or speak with a tax preparer if you live in a state with income tax and want to know the exact rate.

The difference between RMDs and Roth withdrawals

If you have a Roth IRA, the rules are completely different. You have no RMD requirement during your lifetime, and when you do withdraw money, it is not taxed as ordinary income. Roth contributions were made with after-tax dollars, so the IRS already got its tax when you earned the money.

A Roth 401(k) is different: you do have an RMD requirement, and that RMD is taxed as ordinary income just like a traditional 401(k). The Roth treatment only applies to Roth IRAs specifically.

This is one reason some people convert traditional IRA money to a Roth IRA before they reach RMD age. The conversion itself is taxable in the year you do it, but once the money is in the Roth, future growth and withdrawals are tax-free. This strategy only makes sense if you have the cash to pay the conversion tax without taking it from the IRA itself.

Withholding and estimated tax payments

When you receive an RMD, your financial institution can withhold federal income tax directly from the distribution. The default withholding is 10 percent, but you can request a different amount on Form W-4R. If you ask for no withholding, you will owe the full tax when you file your return.

If your RMD is large or you have other income, the 10 percent default may not be enough to cover your actual tax bill. You may need to make estimated tax payments during the year or request extra withholding from your RMD to avoid owing a large amount in April.

If you underpay your taxes throughout the year, the IRS may charge you a penalty on top of the tax itself. Working with a tax preparer or using tax software can help you figure out whether you need to adjust your withholding or make estimated payments.

RMDs from inherited accounts

If you inherit a traditional IRA or 401(k) from someone other than your spouse, you must take RMDs based on your own life expectancy, and those distributions are taxed as ordinary income to you. The rules changed in 2020, and most non-spouse beneficiaries must now empty the account within 10 years.

Inherited Roth IRAs have the same 10-year rule, but the withdrawals are not taxed as ordinary income. If you inherit a Roth IRA from a spouse, you can treat it as your own and avoid RMDs during your lifetime.

The tax treatment of inherited retirement accounts is complex and depends on your relationship to the person who died and when they died. A tax preparer or financial advisor can walk you through what you owe in your specific situation.

Frequently Asked Questions

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

If you are 70½ or older, you can make a direct transfer from your IRA to a may have access to charity, and that amount does not count as income to you. This is called a may have access to charitable distribution. The donation must go straight from the IRA to the charity — you cannot take the money yourself and then donate it. This strategy only works if you itemize deductions and have a charity you want to support.

What happens if I don't take my full RMD?

If you miss your RMD or take less than the required amount, the IRS charges a penalty equal to 25 percent of the shortfall (as of 2023, though this rate has changed in the past). You still owe income tax on the amount you should have taken, plus the penalty. The penalty is one of the harshest in the tax code, so it is important to take your full RMD by December 31 each year.

Do I have to take an RMD in the year I retire?

It depends on your age and the type of account. If you are still working and have a 401(k) with your current employer, you may be able to delay your RMD until after you retire, even if you have reached age 73. IRAs do not have this exception — you must take RMDs starting at age 73 regardless of whether you are working. Check with your plan administrator or tax preparer about your specific situation.

Does my RMD count toward my Medicare premiums?

RMDs are included in your modified adjusted gross income, which the Social Security Administration uses to calculate your Medicare premiums. A large RMD can increase your Part B and Part D premiums. If your income changes significantly, you can ask Social Security to recalculate your premiums based on your current year's income rather than two years prior.

Can I split my RMD between multiple accounts?

Yes, if you have multiple IRAs, you can add up the RMD amounts from all of them and take the total from one account, or split it among them however you want. You cannot do this with 401(k)s — each 401(k) has its own RMD, and you must take the full amount from each plan. If you have both IRAs and 401(k)s, you calculate the RMD for each type separately.