Imagine you’ve spent years—maybe decades—carefully saving for retirement. Your nest egg is finally ready to support the lifestyle you envisioned, but then you’re hit with a not-so-welcome surprise:
Required Minimum Distributions (RMDs). Suddenly, the IRS is knocking, and you’re wondering, “Is Your Required Minimum Distribution considered earned income?”
The short answer? No, it’s not.
But they are considered taxable income.
Understanding why and how this impacts your finances could save you from unnecessary tax headaches and possibly even give you some breathing room in your golden years.
Key Takeaways: Is RMD Considered Earned Income?
- MDs Are Not Earned Income:
These mandatory withdrawals from tax-deferred accounts are considered taxable income but don’t qualify as wages or active earnings. - Taxes and Beyond:
RMDs can push you into higher tax brackets, increase Medicare premiums, and affect Social Security taxation. - Strategic Planning Is a Game-Changer:
Proactive strategies—like Roth conversions or charitable giving—can soften the tax blow. - Legislative Watch:
Staying informed about laws like the SECURE Act is essential for effective planning.
Why Should You Care About RMDs?
Retirement isn’t just about relaxing on a beach or finally tackling that bucket list—it’s also about keeping the money you worked so hard to save.
The IRS, however, sees it differently.
- RMDs are their way of ensuring tax-deferred accounts eventually face taxation.
- At age 72, the IRS may require you to withdraw roughly $10,000 as an RMD.
- This withdrawal not only counts as taxable income but can have a ripple effect on other parts of your financial life, from your Medicare premiums to how much of your Social Security gets taxed.
Understanding Required Minimum Distributions (RMDs)
What Are RMDs?
- Required Minimum Distributions (RMDs): Mandatory withdrawals that the IRS requires you to take annually from your tax-deferred retirement accounts, like traditional IRAs and 401(k)s, starting at age 72. This ensures that taxes are eventually paid on these funds.
- Tax-Deferred Accounts: Retirement accounts where you postpone paying taxes on contributions and earnings until you withdraw the money, such as traditional IRAs and 401(k) plans.
Think of RMDs as the IRS’s polite (but mandatory) way of saying, “You’ve deferred taxes long enough—it’s time to pay up.”
This ensures that retirement funds are eventually taxed, as contributions and earnings in these accounts are typically tax-deferred.
Under the SECURE Act, RMDs now kick in at age 72 (it used to be 70½). For tax-deferred accounts like IRAs and 401(k)s, you’re required to withdraw a minimum amount annually.
Example:
- If you have $500,000 in a traditional IRA, your first RMD will be around $20,000 (based on IRS calculations and Uniform Lifetime Table.).
- IRS Pub 590-B has a lot more information about the minimum distribution rules, with examples.
Did You Know?
Prior to the SECURE Act of 2019, the age to start RMDs was 70½. Keeping up with such changes can significantly affect your retirement strategy.
- How much tax should be withheld from an RMD? RMD Calculator – How to Calculate Your RMD
Why RMDs Aren’t Earned Income
- Earned Income: Money you receive from working, including wages, salaries, tips, and income from self-employment. It doesn’t include investment income or retirement withdrawals.
- Taxable Income: The portion of your income that is subject to income tax after subtracting deductions and exemptions.
RMDs are categorized as unearned income. Earned income—like wages or self-employment earnings—comes from active work. This distinction matters because it affects things like IRA contributions and tax credits that hinge on earned income.
Implications:
- Cannot Contribute to IRAs: Since RMDs are not earned income, they don’t qualify you to make contributions to traditional or Roth IRAs.
- Tax Credits and Deductions: Certain tax credits and deductions are only available if you have earned income.
How Are RMDs Taxed?
RMDs are taxed as ordinary income at your marginal tax rate. This means they are added to your total taxable income for the year.
Myth Busted!
Some believe that RMDs aren’t taxed because they’ve already paid taxes on their contributions. While that’s true for Roth accounts, traditional retirement accounts are tax-deferred, meaning taxes are due upon withdrawal.
For an in-depth analysis of RMD tax implications, see this study on RMD’s impact on taxes.
The account owner is taxed at his or her income tax rate on the amount of the withdrawn RMD. However, to the extent the RMD is a return of basis or is a qualified distribution from a Roth IRA, it is tax free.”
IRS.GOV Website
When meeting with retirees as a financial planner, I often heard the same concern: “I didn’t realize how much taxes would eat into my retirement income!” They were surprised by the ripple effect RMDs had on their overall financial picture.
So here’s the insider tip no one else may have mentioned:
Proactive planning before reaching RMD age can make a significant difference. It’s not just about the withdrawals but about orchestrating your entire financial symphony to play harmoniously.
Case Study:
- Jane Smith, age 72, has a pension income of $30,000 and Social Security benefits of $20,000. Her RMD for the year is $25,000.
- Total Taxable Income Calculation:
- Pension: $30,000
- 85% of Social Security: $17,000 (since her income exceeds the IRS threshold)
- RMD: $25,000
- Total Taxable Income: $72,000
This pushes Jane into the 22% federal tax bracket, whereas without the RMD, she may have been in the 12% bracket.
[Source: IRS 2025 Tax Brackets]
Impact on Medicare Premiums (2025)
Medicare premiums for Part B and Part D in 2025 are income-based, with higher-income individuals subject to Income-Related Monthly Adjustment Amounts (IRMAA). Here are the updated details:
- Standard Premium: The Medicare Part B standard premium for 2025 is $185.00, a $10.30 increase from 2024.
- IRMAA Thresholds:
- For individuals with a Modified Adjusted Gross Income (MAGI) above $106,000 and couples filing jointly above $212,000 (based on 2023 income), IRMAA surcharges will apply.
- Monthly premiums for Part B, including IRMAA, range from $259.00 to $628.90 depending on income brackets.
Example: An additional $12,000 in Required Minimum Distributions (RMDs) could push your MAGI over the threshold, resulting in thousands of dollars in higher Medicare Part B premiums
Income-Related Monthly Adjustment Amounts (IRMAA) for Medicare Premiums: Higher premiums for Medicare Parts B and D charged to individuals with MAGI above certain levels.
Effect on Social Security Taxation
Social Security benefits may be taxable based on combined income:
- Combined Income Formula:
Adjusted Gross Income including RMDs + Nontaxable Interest + 50% of Social Security benefits Adjusted Gross Income including RMDs + Nontaxable Interest+50%of Social Security benefits - Taxation Thresholds:
- Single Filers:
- Up to 50% taxable if combined income is between $25,000 and $34,000.
- Up to 85% taxable if combined income exceeds $34,000.
- Married Filing Jointly:
- Up to 50% taxable if combined income is between $32,000 and $44,000.
- Up to 85% taxable if combined income exceeds $44,000.
- Single Filers:
For further details about Medicare costs in 2025, you can explore the following official resources:
- Learn more about Medicaid and CHIP programs at the official Medicaid site
- Visit the CMS official website for comprehensive information on Medicare, Medicaid, and related programs
- Access the official Medicare website for details on coverage options, premiums, and enrollment periods
Strategies to Mitigate RMD Tax Impact
For more details about What To Do With RMD’s You Don’t Need?, you can read our recent article.
1. Roth IRA Conversions
- Roth Conversions: Moving funds from a traditional IRA or 401(k) into a Roth IRA. You pay taxes on the amount converted now, but future qualified withdrawals from the Roth IRA are tax-free.
- Convert traditional IRA funds to a Roth IRA to avoid future RMDs (since Roth IRAs have no RMDs during your lifetime).
- Be mindful of the immediate tax impact, though.
Journal of Financial Planning – “Evaluating Roth IRA Conversions”
2. Qualified Charitable Distributions (QCDs)
Qualified Charitable Distributions (QCDs): Direct transfers of funds from your IRA to a qualified charity. Amounts up to $100,000 can satisfy your RMD and are excluded from your taxable income.
- Are you a giver?
QCDs let you donate up to $100,000 directly from your IRA to charity, satisfying your RMD without raising your taxable income.
IRS – Qualified Charitable Distributions
3. Optimize Withdrawals
- Have multiple accounts? Strategically withdraw from the ones with the lowest performance.
4. Delay Retirement and RMDs
If you’re still working at 72 and do not own more than 5% of the company, you can delay RMDs from your current employer’s 401(k).
- Continued Tax Deferral: Allows your retirement savings to grow untapped.
- Does not apply to IRAs or plans from former employers.
5. Aggregate and Strategize Withdrawals
Aggregation Rules: IRS guidelines that allow you to calculate RMDs from multiple accounts and take the total amount from one or more accounts, applicable to IRAs but not 401(k) plans.
Taking RMDs strategically from multiple accounts can optimize tax outcomes.
Example: If you have multiple traditional IRAs, calculate the total RMD but withdraw from the account with the highest fees or lowest performance expectations.
This aggregation rule does not apply to 401(k)s; RMDs must be taken separately from each 401(k) account.
Pro Tip:
If you have a previous 401k, try to see if you can roll it over into your current 401k to delay the RMDs from that account.
A Unique Perspective: The Unseen Consequences
The Domino Effect on Financial Aid for Family
Your increased income from RMDs could affect financial aid calculations if you have grandchildren applying for college.
Expected Family Contribution (EFC): Higher grandparent income can reduce the potential aid a student receives.
Solution: Timing Gifts Strategically: Consider how and when to provide financial support to family members.
Sallie Mae – “How Family Income Affects Financial Aid”
State Taxes and RMDs
Some states tax retirement income differently.
- Tax-Friendly States: States like Florida and Texas have no state income tax.
- High-Tax States: States like California and New York may impose higher taxes on retirement income.
- Strategy: Relocation Considerations: Moving to a tax-friendly state could preserve more of your retirement income.
Final Thoughts: Are RMDs Considered Income?
Retirement should be a time to enjoy the fruits of your labor, not worry about complex tax codes and surprise expenses. By understanding that RMDs are not earned income but do impact your taxable income, you can make informed decisions to optimize your retirement strategy.
Remember the words of Benjamin Franklin: “By failing to prepare, you are preparing to fail.” Proactive planning empowers you to navigate the complexities of RMDs confidently.
Take Control of Your Retirement Journey
Understanding the intricacies of RMDs empowers you to make strategic decisions that can enhance your financial well-being in retirement. Remember, it’s not just about compliance—it’s about optimization.
Action Steps:
- Review Your Retirement Accounts: Know where you stand and how much you can expect to withdraw.
- Plan Ahead: Start strategizing before you reach RMD age.
- Consult a Financial Professional: Personalized advice can be invaluable.
Final Thoughts
Imagine sailing into retirement with a clear map, anticipating every financial twist and turn. By unlocking the secrets of RMDs and their role in your income, you’re not just surviving retirement—you’re mastering it.
“The best time to plant a tree was 20 years ago. The second-best time is now.” — Chinese Proverb
Just like planting a tree, the best time to plan for RMDs might have been years ago, but it’s never too late to start making wise financial decisions today.
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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.
