Required Minimum Distributions: What Every Retiree Needs to Know

If you have money in a traditional IRA, 401(k), 403(b), or other tax-deferred retirement account, the IRS requires you to start taking withdrawals -- called Required Minimum Distributions (RMDs) -- once you reach age 70½. Failing to take your RMD results in a 50% penalty on the amount you should have withdrawn.

RMDs begin the year you turn 70½. You have until April 1 of the year following the year you turn 70½ to take your first RMD. After that, RMDs must be taken by December 31 each year.

Important: If you delay your first RMD to April 1, you'll take two RMDs in that year (the first for the prior year, the second for the current year). This can push you into a higher tax bracket and potentially trigger IRMAA surcharges on your Medicare premiums.

Subject to RMDs:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k), 403(b), 457(b) plans (from former employers)
• Inherited IRAs (different rules apply)

NOT subject to RMDs:

• Roth IRAs (during the owner's lifetime)
• Roth 401(k)s (starting in 2024 under SECURE 2.0)

Your RMD is calculated by dividing your account balance (as of December 31 of the prior year) by a life expectancy factor from the IRS Uniform Lifetime Table.

Example:

• Account balance on December 31, 2016: $500,000
• Age in 2017: 72
• IRS life expectancy factor for age 72: 25.6
• RMD for 2017: $500,000 ÷ 25.6 = $19,531

If you have multiple IRAs, you calculate the RMD for each account separately but can take the total from any one or combination of your IRAs. For 401(k)s, you must take the RMD from each account separately.

RMDs are taxed as ordinary income in the year you take them. Large RMDs can:

• Push you into a higher federal tax bracket
• Trigger or increase IRMAA surcharges on Medicare premiums
• Make more of your Social Security benefits taxable
• Affect eligibility for certain deductions and credits

1. Roth conversions before RMDs begin Converting traditional IRA funds to a Roth IRA in your 60s reduces the balance subject to RMDs. Roth IRAs have no RMDs during the owner's lifetime.

2. Qualified Charitable Distributions (QCDs) If you're 70½ or older, you can donate up to $100,000/year directly from your IRA to a qualified charity. The QCD counts toward your RMD but is not included in your taxable income -- a powerful tax reduction strategy for charitably inclined retirees.

3. Take RMDs early in the year Taking your RMD in January gives you the full year to invest the funds and potentially earn returns. It also gives you certainty about your tax situation for the year.

4. Reinvest RMDs in a taxable account If you don't need the RMD for living expenses, reinvest it in a taxable brokerage account. While you'll pay income tax on the RMD, future growth in the taxable account is taxed at lower capital gains rates.

5. Consider a Qualified Longevity Annuity Contract (QLAC) A QLAC allows you to use up to $125,000 (or 25% of your IRA balance) to purchase a deferred annuity that begins payments at age 85. The QLAC balance is excluded from RMD calculations until payments begin.

If you inherit an IRA, different RMD rules apply. Non-spouse beneficiaries generally must withdraw the entire account within 10 years (under the SECURE Act). Spouses have more flexibility, including the option to treat the inherited IRA as their own.

This article is for educational purposes only and does not constitute financial or legal advice. Consult a financial advisor or tax professional for personalized guidance.