As a physician, you’ve worked hard to build substantial retirement savings through your 401(k), traditional IRA, and other tax-deferred accounts. However, the IRS won’t let you keep that money growing tax-free forever. Required minimum distributions, commonly called RMDs, are mandatory withdrawals you must take from certain retirement accounts once you reach a specific age. Understanding these rules is crucial for physicians who want to avoid hefty penalties and plan their retirement income effectively.

What Are Required Minimum Distributions?

Required minimum distributions are the minimum amounts you must withdraw annually from tax-deferred retirement accounts. Think of RMDs as the IRS finally collecting taxes on money that has been growing tax-free for decades. The government gave you a tax break when you contributed to these accounts, and now they want their share.

The concept is straightforward: you received tax deductions for contributions to traditional retirement accounts throughout your career, allowing that money to grow without paying taxes. RMDs ensure the government eventually collects income tax on these funds. The distribution amounts are calculated based on your account balance and life expectancy, with the goal of spreading withdrawals over your remaining lifetime.

When Do RMDs Start?

For most physicians, RMDs begin at age 73. This age recently increased from 70½ due to the SECURE Act 2.0, providing an additional 2.5 years of tax-deferred growth. Your first RMD must be taken by April 1st of the year after you turn 73, and subsequent distributions must be completed by December 31st each year.

However, there’s an important exception for physicians still working. If you’re still employed and participating in your employer’s 401(k) plan at age 73, you can delay RMDs from that specific 401(k) until you retire. This rule only applies to your current employer’s plan, not to IRAs or previous employers’ 401(k) accounts. A 75-year-old radiologist still working part-time at a hospital could delay RMDs from that hospital’s 401(k) but would still need to take distributions from their IRA and previous employers’ retirement accounts.

Which Accounts Require RMDs?

Understanding which accounts have RMD requirements helps you plan your retirement strategy effectively. Traditional IRAs, SEP-IRAs, SIMPLE IRAs, and most employer-sponsored retirement plans like 401(k)s, 403(b)s, and 457(b) plans all require minimum distributions starting at age 73.

Roth IRAs are notably exempt from RMD requirements during the account owner’s lifetime. This makes Roth accounts incredibly valuable for estate planning and long-term wealth preservation. However, inherited Roth IRAs do have RMD requirements for beneficiaries, though the rules differ from traditional accounts.

Roth 401(k) accounts present a unique situation. While the Roth portion grows tax-free like a Roth IRA, employer-sponsored Roth 401(k) accounts are subject to RMD rules. Many physicians roll their Roth 401(k) balances into Roth IRAs upon retirement to avoid this requirement.

Calculating Your Required Distribution

The RMD calculation uses a relatively simple formula, but the numbers can be substantial for high-earning physicians. You divide your account balance as of December 31st of the previous year by a life expectancy factor from IRS tables. For most people, this uses the Uniform Lifetime Table, which assumes a beneficiary 10 years younger than the account owner.

Consider an orthopedic surgeon with a $2 million traditional IRA balance at age 75. Using the life expectancy factor of 24.6 from the IRS table, their RMD would be approximately $81,300 for that year. This amount must be withdrawn and is taxable as ordinary income, potentially pushing the physician into a higher tax bracket.

The percentage withdrawn increases each year as life expectancy decreases. At age 75, you withdraw roughly 4% of your balance. By age 85, this increases to about 6.8%, and by age 95, you’re withdrawing over 11% annually. This accelerating withdrawal schedule can significantly impact your tax planning in later years.

Tax Implications and Strategies

RMDs are taxed as ordinary income, which can create significant tax burdens for physicians with substantial retirement savings. Unlike capital gains, which receive preferential tax treatment, every dollar of your RMD faces your highest marginal tax rate. A retired anesthesiologist might find their RMDs alone push them into the 32% or 37% federal tax bracket, not including state taxes.

Strategic planning can help minimize the tax impact. Some physicians begin taking distributions before age 73 to smooth out their tax burden over more years. This approach, called “filling up the brackets,” involves taking additional withdrawals in years when you’re in lower tax brackets to reduce future RMD amounts.

Consider converting some traditional IRA funds to Roth IRAs during lower-income years, such as the gap between retirement and when RMDs begin. While you’ll pay taxes on the conversion, future growth in the Roth IRA won’t be subject to RMDs, and qualified withdrawals will be tax-free.

Can You Reinvest RMDs?

While you must withdraw your RMD and pay taxes on it, you’re free to reinvest the after-tax proceeds however you choose. Many physicians reinvest their RMDs in taxable investment accounts, continuing to grow their wealth even after satisfying the IRS requirements.

The key difference is that future growth and income from reinvested RMDs will be subject to capital gains treatment rather than ordinary income tax rates when eventually sold. This can provide more favorable tax treatment compared to leaving everything in tax-deferred accounts.

Some physicians use RMDs strategically for charitable giving. Qualified charitable distributions allow you to transfer up to $100,000 annually directly from your IRA to qualified charities. This transfer counts toward your RMD requirement but isn’t included in your taxable income, providing a valuable tax benefit for philanthropically minded physicians.

Special Situations for Physicians

Physicians face unique RMD challenges due to their typically higher account balances and complex financial situations. Those with multiple retirement accounts must calculate RMDs separately for each account type, though IRA RMDs can be aggregated and taken from any of your IRAs.

Practice owners often have multiple retirement accounts from different phases of their careers. A physician might have a 401(k) from their employed years, a SEP-IRA from solo practice, and traditional IRAs from various rollovers. Each account type requires separate RMD calculations, though the total IRA RMD can be satisfied from any single IRA.

Physicians with substantial retirement savings should consider the impact of RMDs on Medicare premiums. Higher income from RMDs can trigger Income-Related Monthly Adjustment Amounts (IRMAA), significantly increasing Medicare Part B and Part D premiums. This additional cost effectively increases the tax burden of large RMDs.

Avoiding Costly Penalties

The IRS imposes severe penalties for missing RMDs. The penalty is 25% of the amount you should have withdrawn but didn’t. Recent changes reduced this from the previous 50% penalty, but it’s still substantial. If you should have taken a $50,000 RMD but forgot, you’d owe a $12,500 penalty in addition to the taxes on the eventual withdrawal.

The penalty can be reduced to 10% if you correct the error quickly and file the appropriate forms. However, avoiding the situation entirely through proper planning and calendar reminders is far preferable.

Setting up automatic distributions can help ensure you never miss an RMD deadline. Many physicians arrange for their RMDs to be distributed monthly or quarterly throughout the year, providing steady income and eliminating year-end scrambling.

Planning Ahead for RMDs

Smart RMD planning begins years before you turn 73. Consider your overall retirement income needs and how RMDs will fit into your tax picture. Physicians with substantial traditional retirement account balances might benefit from early retirement distributions or Roth conversions to reduce future RMD amounts.

Estate planning also plays a crucial role. Inherited retirement accounts have their own RMD rules, and the recent elimination of the “stretch” provision means most non-spouse beneficiaries must empty inherited accounts within 10 years. This can create significant tax burdens for your heirs, making Roth conversions or other strategies more attractive.

Working with a tax professional familiar with physician finances becomes increasingly important as you approach RMD age. The interplay between RMDs, Social Security, Medicare premiums, and other income sources requires careful coordination to minimize your overall tax burden.

Understanding required minimum distributions helps you make informed decisions about your retirement accounts and overall financial strategy. While RMDs represent a significant tax event, proper planning can help you minimize their impact while ensuring compliance with IRS requirements. The key is starting your planning well before age 73 and considering how RMDs fit into your broader retirement and estate planning goals.

This post is for informational purposes only and does not constitute investment advice. Always conduct thorough research and consult with financial professionals before making investment decisions.

About the Author: Dr. BWMD is a practicing physician and parent who writes about the intersection of medicine and personal finance. When not seeing patients or writing about physician finances, he enjoys spending time with his family and teaching the next generation of medical professionals about the importance of financial wellness.