Required Minimum Distributions: What Retirees Need to Know

What Are Required Minimum Distributions?

Required Minimum Distributions (RMDs) are mandatory, annual withdrawals that retirees must begin taking from certain retirement accounts once they reach a specified age. These rules were established to prevent individuals from deferring taxes on retirement savings indefinitely. Once RMDs begin, you must withdraw a minimum amount each year—or face a hefty tax penalty.

RMDs apply to:

Traditional IRAsSEP IRAsSIMPLE IRAs401(k), 403(b), 457(b) plansProfit-sharing plans

Roth IRAs are not subject to RMDs during the owner’s lifetime, making them a valuable tax-planning tool in retirement.

When Do RMDs Start?

As of recent IRS regulations:

If you were born before July 1, 1949, your RMDs began at age 70½.If you were born after June 30, 1949, but before 1951, your RMDs began at age 72.If you were born in 1951 or later, your RMDs begin at age 73.Starting in 2033, the RMD starting age increases to 75.

You must take your first RMD by April 1 of the year following the calendar year in which you reach your RMD age. After that, RMDs must be taken by December 31 every year.

How Are RMDs Calculated?

RMDs are based on your account balance and life expectancy. The IRS provides Uniform Lifetime Tables to help calculate your annual distribution.

What Happens If You Miss an RMD?

Missing your RMD can be costly. As of 2023, the IRS penalty for failing to take your RMD is:

25% of the amount not withdrawn.This can be reduced to 10% if corrected in a timely manner (generally within two years).

To avoid penalties:

Set up automatic withdrawals.Work with a financial advisor or your retirement plan custodian.Mark your calendar with RMD deadlines.

Strategies to Reduce RMD Impact

RMDs can push you into a higher tax bracket or affect your Medicare premiums. Here are some strategies to minimize the tax burden:

1. Roth Conversions

Convert traditional IRA funds to a Roth IRA before RMD age. This reduces your future RMDs, and Roth IRAs don’t require withdrawals during your lifetime.

2. Qualified Charitable Distributions (QCDs)

If you’re 70½ or older, you can donate up to $100,000 per year directly to a qualified charity. This counts toward your RMD and is excluded from your taxable income.

3. Delay Retirement Plan Distributions

If you’re still working at RMD age and own less than 5% of the company, you may delay RMDs from your employer’s plan until retirement.

4. Withdraw Strategically Before RMD Age

Taking withdrawals in your 60s—when you may be in a lower tax bracket—can reduce the size of future RMDs.

RMDs and Taxes

RMDs are taxed as ordinary income at your current tax rate. They may also:

Increase your Social Security taxability.Push you into a higher tax bracket.Affect your Medicare Part B and D premiums through the Income Related Monthly Adjustment Amount (IRMAA).

Smart tax planning is key to avoiding these issues. Consider meeting with a tax advisor to create a personalized withdrawal strategy.

RMDs from Inherited Accounts

If you inherit a retirement account, RMD rules differ depending on your relationship to the deceased and the type of account:

Spouse beneficiaries may roll the account into their own IRA or take RMDs based on their life expectancy.Non-spouse beneficiaries typically must deplete the account within 10 years (under the SECURE Act), with some exceptions.Inherited Roth IRAs also follow the 10-year rule but are tax-free if held for five years or more.

These rules can get complex, so seek guidance when inheriting retirement assets.

RMDs and Multiple Accounts

Each retirement account type has its own RMD rules:

Traditional IRAs: RMDs can be aggregated and taken from one or more IRAs.401(k)/403(b): RMDs must be calculated and taken separately from each plan, unless consolidated into an IRA.Inherited IRAs: RMDs cannot be combined with your own accounts.

Keeping track of multiple accounts can get confusing. Consolidating your accounts—when possible—simplifies RMD management.

How to Take Your RMD

You can take your RMD in various ways:

As a lump sum paymentThrough monthly or quarterly withdrawalsAs a combination of distributions throughout the year

Most custodians offer automatic RMD services to ensure compliance. You can also choose whether to reinvest the withdrawn funds in a taxable brokerage account.

Remember: RMDs cannot be rolled over or converted into Roth IRAs. Once withdrawn, the funds are considered taxable income.

RMD Planning in Retirement

A strong RMD plan helps preserve your wealth, reduce taxes, and provide steady income. Steps to take:

Begin RMD planning at least five years before the first withdrawal.Run income simulations to understand future tax implications.Integrate RMDs into your broader retirement income strategy.Explore tools and software that track withdrawal requirements and deadlines.

Retirement is a long journey—having a plan that evolves with your financial situation is key.

Final Thoughts

Required Minimum Distributions are a critical part of retirement planning. While they may seem like just another rule, managing them strategically can significantly impact your financial health in retirement. The more prepared you are, the less stressful RMDs become.

Start early, work with trusted professionals, and keep your retirement goals front and center. With the right approach, RMDs don’t have to be a burden—they can be just another part of your well-managed financial life.

Looking for guidance on how to align your financial plan with your ideal retirement location? Connect with a trusted advisor today and take the first step toward building a secure, personalized retirement strategy.