RMDs: What to Know
As you approach retirement, it’s important to plan for Required Minimum Distributions (RMDs)—mandatory withdrawals from certain retirement accounts. Starting at age 72 (or later, depending on your birth year), the IRS requires you to withdraw a specified portion of your tax-deferred retirement savings each year. Knowing how RMDs work and their impact on your finances is essential for a smooth retirement strategy.
What Are RMDs?
RMDs are annual withdrawals that the IRS mandates from tax-deferred retirement accounts, such as:
Traditional IRAs
401(k) and 403(b) plans
SEP IRAs and SIMPLE IRAs
RMDs ensure that taxes are eventually paid on funds that grew tax-deferred over time. Roth IRAs are exempt from RMDs during the account holder’s lifetime.
When Do RMDs Start?
Age 72: For individuals born before 1951, RMDs begin at age 72.
SECURE Act Updates: Under the SECURE Act 2.0 (passed in 2022), the starting age for RMDs increased to 73 for those born in 1951 or later, and to 75 for those born in 1960 or later.
Inherited Accounts: Beneficiaries of inherited IRAs may have different RMD rules based on their relationship to the original account holder.
How Are RMDs Calculated?
RMD amounts are calculated using the following formula:
Account Balance: Determine the total balance of your retirement accounts as of December 31 of the previous year.
IRS Life Expectancy Factor: Use the IRS Uniform Lifetime Table to find the life expectancy factor corresponding to your age.
Divide the Balance: Divide your account balance by the life expectancy factor to determine your RMD.
Each retirement account must calculate its RMD separately, but you can withdraw the total amount from one or multiple accounts of the same type (e.g., all IRAs).
Tax Implications of RMDs
Ordinary Income Tax: RMDs are taxed as ordinary income. If you’re in a higher tax bracket, the additional income could increase your tax liability.
Penalties for Non-Compliance: Failing to withdraw your RMD results in a steep penalty—50% of the amount not withdrawn.
Strategies to Manage RMDs
Plan for Taxes
Use tax-efficient withdrawal strategies to minimize the impact of RMDs on your taxable income.
Consider withdrawing more than the minimum in lower-income years to avoid being pushed into a higher tax bracket later.
Qualified Charitable Distributions (QCDs)
If you’re 70 ½ or older, you can donate up to $100,000 annually directly from your IRA to a qualified charity. QCDs count toward your RMD and reduce your taxable income.
Roth Conversions
Converting traditional IRA funds to a Roth IRA before RMDs begin can reduce the size of your tax-deferred accounts and lower future RMDs. While conversions are taxable, Roth IRAs do not require RMDs for the account holder.
Consolidate Accounts
Simplify your RMD process by consolidating multiple retirement accounts. This makes it easier to track balances and manage withdrawals.
Exceptions and Special Circumstances
Still Working Exception: If you’re still employed and own less than 5% of the company sponsoring your 401(k), you may delay RMDs from that account until you retire.
Inherited Accounts: Non-spousal beneficiaries typically need to withdraw all funds within 10 years of the account holder’s death under the SECURE Act.
Final Thoughts
RMDs are a critical component of retirement planning, with significant implications for your tax strategy and overall financial health. By understanding how RMDs work and proactively planning for them, you can minimize taxes and maximize your retirement income.
At Greatstone Wealth, we’re here to help you navigate RMDs and create a retirement plan tailored to your goals. Contact us today to learn more about managing your withdrawals and securing your financial future.
