Required Minimum Distributions
Understanding Required Minimum Distributions and Their Impact on Your Retirement and Taxes
How RMDs Can Affect Your Retirement Income and Tax Bill
If you have money saved in a traditional IRA, 401(k), 403(b), or other tax-deferred retirement account, Required Minimum Distributions (RMDs) are an important part of your retirement income plan. While these withdrawals are mandatory, they can also have a significant impact on your taxes if you don't plan ahead.
Understanding how RMDs work, and developing strategies to manage them—can help you preserve more of your retirement savings and avoid unnecessary tax consequences.
What Are Required Minimum Distributions?
Required Minimum Distributions (RMDs) are the minimum amounts the IRS requires you to withdraw each year from most tax-deferred retirement accounts after reaching your required beginning age.
Under current law:
- Most retirees are required to begin taking RMDs at age 73.
- Individuals born in 1960 or later will generally begin RMDs at age 75 under current law.
The purpose of an RMD is straightforward: retirement accounts such as Traditional IRAs and most employer-sponsored retirement plans grow tax-deferred. Eventually, the IRS requires withdrawals so those funds become subject to income tax.
How Required Minimum Distributions Work
Your first RMD generally must be taken by April 1 of the year following the year you reach your required beginning age. Every RMD after that must be taken by December 31 each year.
The amount you must withdraw is determined by:
- Your retirement account balance as of December 31 of the previous year
- IRS life expectancy tables
- Certain beneficiary circumstances, when applicable
Because the calculation changes annually, it's important to review your required distribution each year.
What Happens If You Miss an RMD?
Failing to take your full Required Minimum Distribution can result in a substantial IRS penalty.
Current law provides for an excise tax of up to 25% of the amount not withdrawn. In many cases, the penalty may be reduced if the missed distribution is corrected promptly and IRS requirements are met.
Even if you miss your RMD, you'll still owe ordinary income tax on the distribution once it is taken.
How RMDs Can Increase Your Tax Bill
Required Minimum Distributions are generally taxed as ordinary income. Depending on your situation, a larger withdrawal could:
- Increase your taxable income for the year
- Cause a greater portion of your Social Security benefits to become taxable
- Increase your Medicare income-related monthly adjustment amount (IRMAA)
- Affect eligibility for certain tax deductions or credits
That's why proactive planning before your RMD age can make a meaningful difference.
Should You Delay Your First RMD?
Although you have the option to delay your first Required Minimum Distribution until April 1 of the following year, that isn't always the best strategy.
Waiting means you'll likely take two taxable distributions in the same calendar year, your delayed first RMD and your second annual RMD. For some retirees, this can increase taxable income and potentially result in higher taxes or Medicare premiums.
Every situation is different, so it's important to evaluate the timing before making a decision.
What If You Don't Need the Money?
Even if you don't need the income, you're generally still required to take your RMD.
Fortunately, there are several planning strategies that may help reduce the long-term tax impact before you reach your required beginning age, including:
- Roth conversion strategies
- Qualified Charitable Distributions (QCDs), when eligible
- Tax-efficient withdrawal planning
- Coordinating withdrawals with other sources of retirement income
- Long-term tax planning before RMDs begin
The earlier these strategies are implemented, the more flexibility you may have to manage future taxes.
Learn How to Make RMD Rules Work for You
Recent changes to RMD rules have created new planning opportunities, but they have also made retirement income planning more complex.
Join one of our complimentary informational workshops to learn:
- How current RMD rules affect your retirement plan
- Strategies to help reduce the tax impact of RMDs
- Ways to coordinate withdrawals with Social Security and other retirement income
- Tax-efficient retirement distribution strategies that may help preserve more of your wealth
Reservations are required, and seating is limited.
Call today to reserve your seat or schedule a retirement