Linda retired in 2024 with $1.2 million in her traditional IRA. She figured she'd let it grow tax-deferred for a few more years — no rush. Then she turned 73 and the IRS sent her a notice: take out $47,000 this year, or we'll take 25% of what you should have withdrawn. That's not a tax bill. That's a penalty on top of the tax bill.

Most retirees don't think about Required Minimum Distributions until the letter arrives. By then, the damage is already baked in — you're liquidating assets at whatever the market gives you, paying ordinary income tax on every dollar, and potentially bumping yourself into a higher bracket that triggers Medicare surcharges.

The rules changed. Twice. And if you're still operating off what your advisor told you in 2019, you're working with outdated numbers. Here's what actually applies in 2026.

What Is a Required Minimum Distribution (RMD)?

An RMD is the minimum amount the IRS forces you to withdraw from tax-deferred retirement accounts each year once you hit a certain age. It applies to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and 457 plans. The logic is simple: the government gave you a tax break going in. Now they want their cut coming out.

The amount you must withdraw is calculated by dividing your account balance (as of December 31 of the prior year) by a life expectancy factor from the IRS Uniform Lifetime Table. The older you get, the bigger the percentage — because the IRS assumes you have fewer years to spread it across.

Here's the part most people miss: RMDs are taxed as ordinary income. Not capital gains. Not qualified dividends. Ordinary income — at whatever bracket that withdrawal pushes you into. A $50,000 RMD on top of Social Security and a pension can easily land you in the 22% or 24% bracket.

"The IRS doesn't care if the market is down 30%. Your RMD is based on last year's balance, and you're selling at today's price. That's forced liquidation with a tax bill attached."

Roth IRAs are the exception. The original owner of a Roth IRA never has to take RMDs during their lifetime. That's one of the most powerful features of a Roth — your money compounds tax-free with no forced withdrawals. (Inherited Roths are a different story — beneficiaries do have distribution requirements under the SECURE Act rules.)

The 2026 RMD Age Chart: 73, 75, and the SECURE 2.0 Timeline

The starting age for RMDs has shifted three times in the past six years. If you're confused, you're not alone — the rules literally depend on what year you were born.

Here's the current breakdown:

That two-year bump from 73 to 75 is a big deal. If you were born in 1960, you get two extra years of tax-deferred growth compared to someone born in 1959. On a $1 million IRA growing at 7%, that's roughly $150,000 more compounding before the government forces your hand.

The First-Year Trap

There's a special rule for your first RMD: you can delay it until April 1 of the year after you turn 73 (or 75). Sounds generous — but there's a catch. If you delay your first RMD into the following year, you'll take two RMDs in one calendar year — the delayed first-year distribution plus your regular second-year distribution. That double hit can spike your taxable income and push you into a higher bracket, trigger IRMAA surcharges on Medicare premiums, and increase the portion of your Social Security that gets taxed.

Most advisors recommend taking your first RMD in the actual year you turn 73 (or 75) to avoid the double-up. Spread the pain.

The Penalty for Missing an RMD (And How It Dropped From 50% to 25%)

Before 2023, the penalty for missing an RMD was 50% of the amount you should have withdrawn. That was one of the harshest penalties in the entire tax code. Miss a $40,000 RMD? The IRS took $20,000. On top of the income tax you still owed on the withdrawal.

SECURE Act 2.0 cut that penalty to 25%. And if you correct the mistake within two years (by taking the missed distribution and filing an amended return), the penalty drops further to 10%.

That's still not pocket change. A missed $50,000 RMD costs you $12,500 at the 25% rate — or $5,000 if you catch it quickly. But it's a massive improvement over the old regime where the same mistake would have cost $25,000.

How to Correct a Missed RMD

  1. Take the missed distribution immediately — withdraw the amount you should have taken
  2. File IRS Form 5329 (Additional Taxes on Qualified Plans) with your tax return
  3. Request a penalty waiver — attach a letter explaining the reason for the shortfall. The IRS routinely waives the penalty for "reasonable cause" (illness, advisor error, honest mistake)
  4. If corrected within 2 years: penalty auto-reduces to 10% under SECURE 2.0

The IRS has actually been lenient on RMD penalty waivers historically — especially for first-time misses. But "I forgot" is a much weaker argument than "my custodian miscalculated." Document everything.

5 Legal Strategies to Reduce Your RMD Tax Hit

You can't avoid RMDs entirely (unless you're in a Roth). But you can shrink them, time them, and redirect them to minimize the damage. Here are five strategies that actually work:

1. Roth Conversions Before RMDs Start

Convert traditional IRA dollars to a Roth IRA in your 60s — ideally during the gap years between retirement and your RMD start date when your taxable income is lowest. You'll pay income tax on the conversion now, but every dollar that moves to the Roth is permanently exempt from future RMDs. If you convert $100,000 over four years before age 73, that's $100,000 (plus growth) that never hits your RMD calculation.

2. Qualified Charitable Distributions (QCDs)

If you're 70½ or older, you can send up to $105,000 per year (2024 limit, indexed for inflation) directly from your IRA to a qualified charity. The distribution counts toward your RMD but is not included in your taxable income. This is the single best tax hack for charitably-inclined retirees. The money goes from your IRA to the charity — it never touches your bank account, and it never shows up on your 1040.

3. Qualified Longevity Annuity Contracts (QLACs)

A QLAC lets you move up to $200,000 from your IRA into a deferred annuity that starts paying at a later age (up to 85). The QLAC amount is excluded from your RMD calculation until the annuity payments begin. This effectively shrinks your RMD base today while guaranteeing income later. It's not for everyone — you're locking up money — but for longevity risk, it works.

4. Strategic Timing and "Bracket Surfing"

Take distributions in years when your income is lower — maybe you had large medical deductions, or your spouse stopped working, or you're between Social Security filing and RMD age. The goal is to fill up lower tax brackets on purpose, so your RMDs don't push you into higher ones later. This pairs well with Roth conversions: convert enough each year to fill the 12% or 22% bracket, then stop.

5. Asset Location: Put High-Growth Assets in the Roth

If you have both traditional and Roth accounts, hold your highest-growth investments in the Roth (where gains are tax-free) and keep lower-growth or income-producing assets in the traditional IRA. This naturally slows the growth of your traditional IRA balance — which means smaller RMDs over time. It's not a magic bullet, but over 10+ years the difference compounds.

Why Mortgage Notes Inside an IRA Change the RMD Equation

Here's where most retirement content stops: "reduce your RMDs with these five tricks." Fine. But what if the asset inside your IRA was doing more of the heavy lifting?

Most IRAs are stuffed with mutual funds, ETFs, and maybe some bonds. When it's time to take an RMD, you sell shares at whatever the market gives you. If the S&P is down 20%, you're selling low and paying taxes on the withdrawal. That's the forced liquidation problem.

Mortgage notes work differently. A note inside a self-directed IRA generates monthly cash flow — borrower payments come into the IRA as interest income. When it's RMD time, the cash is already sitting there. You're not selling an asset at a loss. You're distributing cash that the note already produced.

"The best RMD strategy isn't just about reducing the withdrawal — it's about making sure the asset inside your IRA is producing enough cash that the withdrawal doesn't hurt."

You're still subject to RMD rules in a traditional SDIRA. But when the note is throwing off $800/month in payments and your annual RMD is $35,000, you've already got $9,600 sitting in cash before you touch the principal. The math just works cleaner.

RMDs vs. Living Off Note Income: A Side-by-Side

Let's compare two retirees. Both are 74, both have $500,000 in retirement accounts.

Retiree A: Traditional IRA with index funds

Retiree B: Self-directed IRA with 4 performing mortgage notes

Same RMD. Same tax treatment. Completely different experience. Retiree A is a forced seller. Retiree B is a cash-flow collector who happens to move some of that cash outside the IRA once a year.

And if Retiree B had those notes in a Roth SDIRA? No RMD at all. That $50,000 in annual note payments just keeps compounding — tax-free — until they choose to take it out. Or don't.

That's the real power play: notes inside a Roth don't just reduce the RMD problem. They eliminate it entirely.

AJ Dent is the founder of Take Notes Capital, a mortgage note investing firm specializing in non-performing notes. If you're exploring SDIRA investing, note income strategies, or retirement cash flow alternatives, book a free strategy call — no pitch, just math.