Understanding Required Minimum Distributions (RMDs)
and How They Impact Your Retirement 

As you approach or enter retirement, one of the key financial milestones to be aware of is the Required Minimum Distribution (RMD). Starting at age 73, the IRS requires individuals with traditional IRAs and employer-sponsored retirement accounts to begin withdrawing a portion of their savings. This rule is a critical component of retirement planning, as it carries tax implications that could significantly affect your bottom line. 

If you're nearing 73, you may be wondering how RMDs work and how they can be managed to best serve your financial goals. Let’s take a closer look at RMDs, what you need to know, and how to plan effectively.

What is an RMD?

An RMD is the minimum amount you must withdraw annually from tax-deferred retirement accounts such as Traditional IRAs and 401(k)s once you reach the age of 73. The purpose of the RMD rule is to ensure that you don’t defer taxes indefinitely on retirement savings. 

When Do RMDs Begin? 

When you turn 73, you’ll need to begin taking RMDs by April 1st of the year following your 73rd birthday. For example, if you turn 73 in 2024, you must take your first RMD by April 1, 2025. After the first year, RMDs are due by December 31st each year.  

How Are RMDs Calculated? 

The amount of your RMD is calculated by dividing the balance of your retirement account as of December 31st by a life expectancy factor from IRS tables. The older you are, the smaller the percentage you need to withdraw. 

In some cases, if you're married and your spouse is more than 10 years younger than you, the life expectancy factor is based on your joint life expectancy, which can result in a lower RMD amount. 

Don’t worry, we can help you with this calculation. 

The Tax Impact of RMDs 

It’s important to remember that RMDs are taxed as ordinary income. This means the money you withdraw from traditional retirement accounts, including 401(k)s and IRAs, will be added to your taxable income for the year, potentially pushing you into a higher tax bracket. This is why planning ahead is crucial—taking withdrawals without a strategy could result in a hefty tax bill. 

RMDs and Charitable Giving: A Smart Strategy 

For those who are charitable, Qualified Charitable Distributions (QCDs) offer an excellent way to reduce the tax impact of RMDs. A QCD allows you to donate a portion of your RMD directly to a qualified charity, tax-free. This can help satisfy all or part of your RMD requirement while also benefiting causes you care about. To learn more about how QCDs can enhance your charitable giving strategy, click here to read more about Qualified Charitable Distributions.

Options for RMDs 

While RMDs must be taken annually, there are a few key options to help manage the process: 

1. Delay Your First RMD

You can delay your first RMD until April 1st of the year after you turn 73. However, if you delay, you’ll need to take two RMDs in that second year, which could increase your taxable income for that year. 

2. Monthly Distributions

Instead of withdrawing a lump sum, you can set up monthly RMDs. This can help with cash flow management and may reduce the impact of a large, one-time withdrawal on your taxes. 

3. Update Your Beneficiaries

It’s important to ensure your beneficiaries are up to date. While you have flexibility in choosing beneficiaries for IRAs, you must designate your spouse as the beneficiary for employer-sponsored retirement plans unless they explicitly waive this right. 

Do I have to take an RMD if I inherit a retirement account? << Click here to learn more

RMDs and Employer-Sponsored Retirement Plans 

If you have retirement accounts through your employer, such as a 401(k) or 403(b), the same age 73 rule applies. However, there’s an exception if you’re still working: you can delay your RMDs until you retire, as long as you own 5% or less of the company. 

Additionally, some retirement plans allow for lump-sum distributions, which may be taxed differently. Speak to your plan administrator to understand the best option for your circumstances. 

Why RMDs Are a Key Consideration in Retirement Planning 

The start of RMDs is an important milestone in your retirement journey. But RMDs are not just a requirement—they’re also an opportunity. Effective planning can help minimize taxes, reduce the impact on your lifestyle, and ensure that your income needs in retirement are met. 

Because RMDs are taxable, strategic planning is essential. Whether it’s by converting some of your savings to Roth IRAs, managing withdrawals, or creating tax-efficient strategies for your portfolio, working with a financial professional can help optimize the timing and size of your distributions, keeping your retirement on track. Click here to learn more about Roth Conversions.