Why do 401ks have rmds

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Last updated: April 8, 2026

Quick Answer: 401(k) plans have Required Minimum Distributions (RMDs) because the IRS requires tax-deferred retirement accounts to begin distributing funds once the account holder reaches a certain age, ensuring taxes are collected on the deferred contributions and earnings. The SECURE Act of 2019 raised the RMD age from 70½ to 72, and the SECURE 2.0 Act of 2022 further increased it to 73 starting in 2023, with plans to raise it to 75 by 2033. Failure to take RMDs results in a steep penalty of 25% of the amount not withdrawn, reduced to 10% if corrected within two years. RMDs apply to traditional 401(k)s but not Roth 401(k)s while the original owner is alive, as Roth contributions are made with after-tax dollars.

Key Facts

RMDs are required by the IRS for tax-deferred retirement accounts like traditional 401(k)s to ensure taxes are paid on deferred contributions and earnings.
The SECURE Act of 2019 increased the RMD age from 70½ to 72, and SECURE 2.0 Act of 2022 raised it to 73 starting in 2023, with plans to increase to 75 by 2033.
Failure to take RMDs results in a 25% penalty on the amount not withdrawn, reduced to 10% if corrected within two years, as per IRS rules.
RMDs do not apply to Roth 401(k)s while the original owner is alive, since contributions are made with after-tax dollars and qualified distributions are tax-free.
RMD amounts are calculated annually based on the account balance at the end of the previous year and the account holder's life expectancy from IRS tables.

Overview

Required Minimum Distributions (RMDs) are mandatory withdrawals that the Internal Revenue Service (IRS) requires from tax-deferred retirement accounts, including traditional 401(k) plans, once the account holder reaches a specified age. The concept dates back to the Employee Retirement Income Security Act (ERISA) of 1974, which established 401(k) plans, but RMD rules were formalized under the Tax Reform Act of 1986 to prevent indefinite tax deferral and ensure the government collects taxes on these funds. Historically, the RMD age was set at 70½, but recent legislation has updated this threshold. RMDs apply to traditional 401(k)s, 403(b)s, and IRAs, but not to Roth accounts during the owner's lifetime. The purpose is to balance retirement savings incentives with tax revenue collection, as contributions to traditional 401(k)s are made pre-tax, reducing taxable income during working years. According to the Investment Company Institute, as of 2023, 401(k) plans held over $7.3 trillion in assets, making RMDs a critical component of retirement planning and tax policy.

How It Works

RMDs for 401(k) plans operate through a specific calculation and timeline set by the IRS. Each year, starting at the required age (currently 73 as of 2023 under SECURE 2.0), account holders must withdraw a minimum amount based on their account balance at the end of the previous year and their life expectancy from IRS Uniform Lifetime Table. For example, if someone is 73 with a $500,000 balance and a life expectancy factor of 26.5, their RMD would be about $18,868 ($500,000 ÷ 26.5). The first RMD must be taken by April 1 of the year after turning the required age, with subsequent annual deadlines of December 31. The process involves notifying the plan administrator, who may calculate the RMD, but the account holder is ultimately responsible. RMDs are taxed as ordinary income in the year withdrawn, and if multiple 401(k)s are held, RMDs must be calculated separately for each but can be taken from any one account. Exceptions exist for inherited accounts, which have different rules under the SECURE Act.

Why It Matters

RMDs matter significantly because they impact retirement income, tax liability, and estate planning for millions of Americans. By forcing withdrawals, RMDs ensure that tax-deferred savings are eventually taxed, contributing to federal revenue; in 2022, RMDs generated billions in tax income. For individuals, RMDs can affect Social Security taxation and Medicare premiums, as increased income may push them into higher tax brackets. Proper planning is essential to avoid the 25% penalty for missed RMDs and to manage cash flow in retirement. RMDs also influence investment strategies, as retirees may need to adjust portfolios to cover withdrawals. With an aging population—over 10,000 Americans turn 65 daily—understanding RMDs is crucial for financial security. Recent changes, like the age increase to 73, offer more flexibility for those who don't need immediate income, but they also require staying updated with IRS guidelines to avoid costly mistakes.