403(b)s and RMDs
April 18, 2026
By Barbara O'Neill, CFP®, AFC®
Required minimum distributions (RMDs) are mandatory (taxable) annual withdrawals from traditional retirement savings accounts. They began with the establishment of IRAs in 1974. It is possible for some “early start” 403(b) savers to grow money tax-deferred in their accounts for 50 years before RMDs begin. For example, from age 23 to 55 while working and from age 56 to 73 in the years following retirement. RMDs must begin at age 73 for taxpayers born from 1951-1959 and at age 75 for those born in 1960 and later.
Working 403(b) participants are in the accumulation phase of retirement planning. The focus is regular saving and, ideally, “maxing out” annual contributions to the highest amount allowed by law. It is equally important, however, to practice tax diversification and spread retirement savings across tax-deferred, tax-free (Roth), and taxable accounts to manage future tax liability. Otherwise, its “Houston, we have a tax problem” in your 70s.
This post describes fifteen concepts that 403(b) participants need to know about RMDs and some personal insights as an older account owner. It concludes with a discussion of research about RMDs, three “need to know” facts, and six take-away action steps.
The Power of Compound Interest
While many people can define compound interest (interest on interest), fewer appreciate its impact on their personal savings. As a financial educator for older adults, I hear students say they never expected in their 20s or 30s that they would accumulate the wealth they have at age 60+. Also, they expected to be in a lower tax bracket in retirement while their income, when RMDs begin, is higher than when they were working.
Pro Tip: Periodically assess the growth of your savings using the online 403(b) Savings Calculator.
Financial Gap Years
Gap years for older adults are the time between age 59.5 (when there are no more early withdrawal penalties on money removed from tax-deferred accounts) and the start of RMDs. In other words, 13.5 years or 15.5 years (depending on birth year) when early 403(b) plan withdrawals are optional.
Three common reasons for withdrawing tax-deferred funds early are needing money in your 60s for living expenses, postponing Social Security up to age 70 to earn higher future benefits, and decreasing account balances and spreading out taxes over more years.
The First RMD
The required beginning date (RBD) for RMDs is the absolute final deadline when retirees must start withdrawing funds from tax-deferred retirement accounts. The first distribution must be taken by April 1 of the year after reaching the required age (e.g., 4/1/27 if you turn 73 in 2026). However, delaying the first withdrawal means taking two RMDs the following year, potentially increasing taxable income and affecting Medicare premiums and tax brackets.
Pro Tip: Before delaying your first RMD, estimate your projected income and tax bracket at ages 73 and 74.
RMD Calculations
After year one, RMD withdrawals must be made by December 31 of every year. Example: 2026 RMDs by 12/31/26. Calculations are based on the account owner’s age and the account balance on December 31 of the previous year. To determine the RMD, divide the prior year account balance by the appropriate age-based divisor in the IRS Uniform Lifetime Table. For example, a 73 year old “super saver” with a $1,000,000 balance and a life expectancy factor of 26.5 would have a RMD of $37,736 (rounded).
Pro Tip: Double check your math or test RMD scenarios with an online RMD calculator.
403(b) Account Consolidation
Some 403(b) participants have multiple public sector jobs and 403(b) accounts. Current tax law allows those taxpayers to aggregate multiple 403(b)s, calculate the RMD for each one separately, and withdraw the total RMD due for all accounts from just one or any combination of the 403(b)s. This flexibility can help with tax planning, portfolio rebalancing, or simplifying distributions.
In-Kind Transfers
In-kind transfers occur when RMDs are satisfied by moving assets directly from a retirement account to a taxable brokerage account without selling them first. The value of transferred assets counts toward the RMD, and taxes are owed on their fair market value at the time of transfer. Doing this lets retirees maintain investment positions (e.g., VTSAX) and fulfill RMD obligations without liquidating holdings. Another source of money (e.g., outside cash or withholding on a pension or Social Security) is required to pay the tax.
The Still Working Exception
Some 403(b) participants work until their late 70s or beyond. The still-working exception allows those who are still employed at RMD age to delay RMDs from their current employer’s 403(b) until retirement. The RBD is April 1 of the year following the year of separation from service. Delaying withdrawals, however, can lead to larger RMDs and higher taxes later. RMDs from other retirement accounts, like IRAs or previous employer plans, still apply.
403(b) Oversaving
Putting all your retirement savings in a traditional 403(b) is taxing. Picture aggressive (“maxed out”) early savers who save $3 million by age 73. It can happen. Their RMD at age 73 will be $113,208, which will definitely change a tax bracket! To avoid this situation, consider placing similar amounts of retirement savings in tax-deferred, Roth, and taxable (brokerage) accounts. Later, you can choose which accounts to draw from to manage your tax bracket, reduce taxes, and better control income-related costs like Medicare premiums.
403(b) Tax Impacts
RMD withdrawals are added to 403(b) account owners’ other income (e.g., pension, Social Security, interest) and taxed at the marginal tax rate for their tax filing status (e.g., single and married filing jointly). Even a modest RMD can move part of a taxpayer’s income to a higher tax rate. Increased income can also raise Medicare Part B and D premiums via IRMAA surcharges and trigger the net investment income tax.
403(b) Tax Penalties
The penalty for failure to take an RMD, or the correct amount, is 25% of the amount that should have been withdrawn but wasn’t. Example: an RMD is $10,000, only $6,000 was withdrawn, the shortfall is $4,000, and the 25% penalty is $1,000. If the mistake is corrected by the end of the second year following the year that the shortfall was due, the penalty may drop to 10% ($400). Regular income tax is due on the full RMD amount.
403(b) Tax Withholding
Like other sources of income, RMDs for 403(b) plan withdrawals require advance tax payments to the IRS. Commonly used methods are requesting tax withholding through the plan custodian (20% is often used as a default percentage), over-withholding taxes somewhere else (e.g., pension, Social Security, job), and quarterly estimated tax payments to the IRS. Safe harbor rules should be followed to avoid underwithholding penalties.
Pro Tip: Use the online IRS Tax Withholding Estimator to check the accuracy of your withholding estimates.
RMD Withdrawal Frequency
403(b) participants can decide the frequency of their RMD withdrawals (e.g., monthly, quarterly, or annually) and most plan custodians offer automatic RMD services. While an annual lump sum distribution is preferred by many, research at George Mason University found that the optimal strategy for RMD withdrawals is equal monthly installments of 1/12 the annual amount. Doing this smooths out the volatility of stock market returns.
Roth 403(b) Rules
Under the SECURE 2.0 Act, Roth 403(b)s, similar to Roth IRAs, are no longer subject to RMDs during the account owner’s lifetime. Roth accounts are funded with after-tax dollars and account owners can continue to make tax-free withdrawals during their lifetime once they reach age 59 ½ and the Roth account is open for at least five years. After the account owner’s death, beneficiaries are subject to RMD distribution rules.
RMD Rules for 403(b) Beneficiaries
For spousal beneficiaries of a 403(b), RMD rules are more flexible than for non-spouse heirs. They can treat the account as their own or as an inherited account with RMDs based on the survivor’s life expectancy. Non-spouse beneficiaries must fully distribute an inherited account within 10 years.
If the account owner died on or after their RBD, RMDs must be taken in years one through nine following the owner’s death. If a charity is the beneficiary, RMDs are irrelevant. Funds go entirely to the charity untaxed because charities are tax-exempt.
Uses of RMD Funds
RMD withdrawals can be used in three different ways or a combination thereof. The money can be spent (e.g., living expenses, luxuries, travel), gifted (family, charities), or re-saved in taxable (bank and brokerage) accounts at the account owner’s discretion.
Pro Tip: Download the Required Minimum Distribution Planning Worksheet to make a personal RMD plan.
Personal RMD Insights
In my first post for 403(b)wise, I described my “million dollar mistake,” waiting to start a 403(b) at age 34 instead of 25. Turns out, this was a blessing in disguise. I could have had a $3 million+ 403(b) balance and six-figure RMDs. Instead, at age 25, I began dollar-cost averaging into mutual funds for no particular purpose. Accidental tax diversification. Today, my 403(b) and taxable accounts have similar balances. I also Roth-converted a traditional IRA as much as I could. My tax bill was greatly reduced as a result of these actions.
Pro Tip: Don’t put all of your retirement savings into tax-deferred accounts that are subject to RMDs.
Research Results
Recent research by Vanguard found that 6.7% of its investors with IRAs did not take a RMD. Excise taxes on missed RMDs collectively cost investors as much as $1.7 billion annually. The average RMD amount was $11,600 which generates a 25% penalty of $2,900.
Research by J.P. Morgan Asset Management found that about 80% of retirees don’t withdraw money from their accounts before RMDs begin and 84% of those taking RMDs take only the minimum amounts. As income increases with the start of RMDs, spending increases.
An academic paper in the Journal of Public Economics found that tax policy may influence intergenerational transfers. Parents with bequest motives grow money tax-deferred for as long as possible and then start transferring money once RMDs require assets to be withdrawn.
Three (More) Things
- Consider tax efficiency for reinvested RMD withdrawals (e.g., municipal bonds and stock index funds).
- Inquire if a Roth 403(b) option exists and if in-plan Roth conversions are permitted by your employer.
- Don’t be angry about RMDs. Be grateful for your accumulated savings and strategic to reduce taxes.
Six Smart Strategies
No. 1: Create a RMD Spending Plan — Decide how to use this money (e.g., take a vacation, make charitable gifts, and save/invest the remainder).
No. 2: Practice Tax Diversification — Place retirement savings in tax-deferred, tax-free, and taxable accounts to reduce your tax burden in later life.
No. 3: Plan Ahead — Make plans while still working to minimize taxes on future RMDs (e.g., Roth 403(b) and Roth IRA investing).
No. 4: Follow the Research — Consider taking annual RMD withdrawals in monthly or quarterly segments instead of a single lump sum.
No. 5: Consider Gap Year RMDs — Start decreasing your 403(b) balance a decade or so before RMDs must begin to lower future taxes.
No. 6: Get Help When Needed — Seek advice about RMD withdrawals from your 403(b) vendor and tax implications from a financial planner.
In Summary
Working age 403(b) participants: you have been warned, The actions that you take today, especially tax diversification, will affect the taxes you owe in the future. RMDs are a fact of life when you have tax-deferred accounts. You will pay taxes in the future on an unknown future income at an unknown future tax rate.
This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.
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Dr. O'Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.