What Are the Tax Consequences of Taking an RMD?

Every dollar you take as an RMD is treated as ordinary income in the year you receive it, which has real tax consequences worth understanding. Unlike long-term capital gains, which are taxed at lower rates, RMD income is taxed at the same rates as wages and other ordinary income, so a large RMD can push you into a higher bracket. RMD income can also affect other parts of your financial picture, including whether your Social Security benefits become taxable and how much you pay for Medicare premiums through the income-related monthly adjustment amount. You can have federal income tax withheld directly from your RMD by telling your IRA custodian what percentage to withhold, which avoids the need to make separate estimated tax payments. Planning your RMD timing and the accounts you draw from can make a meaningful difference in how much tax you pay, which is why many people work with a tax professional on this once they reach their early seventies.