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When you contribute money to a pre-tax retirement account like a traditional 401k or IRA,

you receive a tax deduction.

In addition, your invested dollars inside of the account, they grow tax-free.

But there's no free lunch.

In the future, when you withdraw money from your pre-tax accounts,

the withdrawals will be taxed as ordinary income. And whether you want to or not, at age 73,

the IRS is going to knock on your door and force you to begin to take taxable withdrawals each

year. These forced withdrawals are known as required minimum distributions or RMDs, and they act as a safeguard against people using a retirement account to avoid paying taxes.

In other words, RMDs ensure that the IRS receives their share of taxes on this bucket of money that's never been taxed before.

Your first RMD at age 73 will represent about 4% of the account balance

and will continue to increase as you get older. So if you have $1 million in a pre-tax IRA

at age 73, your first required minimum distribution will be around $40,000, which will be taxed

as ordinary income. For retirees who rely on their

pre-tax accounts to pay for living expenses in retirement, this forced taxable withdrawal isn't

an issue. They need the money and would be taking a withdrawal even if the IRS wasn't forcing

them to. But for those who don't need the income, either because they have other income

sources or more tax-efficient account types to withdraw from, RMDs can be a giant burden. Unwanted

taxable distributions can spike your tax bill, cause Social Security income to become more taxable,

and even cause Medicare premiums to increase due to those pesky Irma surcharges.

Since RMDs are, as the name implies, required, many people think that they lose all

control over these taxable distributions once they begin.

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