Make the Most of Your Required Minimum Distributions

1. When do I have to start taking my RMDs?
2. How does the IRS determine the amount I have to withdraw every year?
3. What happens if I don’t take my RMDs on time – or at all?
4. Is there a way to avoid taking RMDs?
5. Do the RMD rules apply to inherited IRAs?
6. How can I reduce the tax cost of my RMDs?

1. When do I have to start taking my RMDs?

Over the past few years, the age you are required to begin taking RMDs has continuously risen. Currently, the age is 73, following the passing of the SECURE Act 2.0 in 2022. And while this age applies to retirees born between 1951-1959, those born in 1960 or later will have a different starting age of 75.

Generally, any RMDs must be taken by December 31 of the given year. However, there is an exception to the rule that allows retirees to defer their first RMD to as late as April 1 of the following calendar year. While this would allow your IRA to extend its tax-deferred growth, it would also require you to take two withdrawals in one year (one in April and one in December). Doing so would likely raise your tax bill for the year, and also potentially subject you to increased Medicare premiums – so it’s essential to talk the option over with your advisor.

2. How does the IRS determine the amount I have to withdraw every year?

There are two main factors that determine how much your required withdrawal is each year: the balance in your account on December 31 of the previous year and your age on December 31 of the current year. Since these are fluctuating factors, your RMD amount will change year to year.

To determine your required distribution, the IRS uses a life expectancy table that projects how your retirement savings are expected to last over the remaining course of a married couple’s life (regardless of whether you’re actually married or not – this table also applies to single individuals). The table gives you different life expectancy factors every year to divide into your account balance – and the result is how much you must withdraw. For example, if you are 74, the IRS table gives you a life expectancy factor of 25 1/2. If you had $500,000 in your IRA at the end of the previous year, you’ll need to withdraw $19,607 ($500,000/25.5).

For account owners with a spouse who is at least 10 years younger than themselves, the IRS provides a different set of tables to use, called the Joint and Last Survivor table. This table provides smaller RMDs per year, because the account will likely need to be stretched over a longer period of time.

If you want, you can withdraw more than the required amount every year – but remember, you can’t apply any excess withdrawals to RMD requirements for future years.

3. What happens if I don’t take my RMDs on time – or at all?

As Benjamin Franklin once said, nothing in this world can be certain but death and taxes. If you miss the deadline for taking your RMDs or withdraw too little, the IRS can assess a 25% penalty on the amount you missed. However, if you correct an RMD error within two years, that 25% penalty drops to 10%.

The best thing you can do if you should miss an RMD is to immediately fix the error by withdrawing the required amount. Once you’ve done that, you can request a waiver of the penalty from the IRS, which they will often grant if the mistake was due to a reasonable error.

4. Is there a way to avoid taking RMDs?

If you’re hoping to be rid of RMDs, you have a couple of options. The first is to convert your tax-deferred retirement account into a Roth IRA – an account that isn’t subject to RMDs during the owner’s lifetime. If you choose to go this route, remember that the tradeoff is having to pay taxes on the amount that is converted. And, if you’re already 73, you’ll still have to take the RMDs that accumulated before the conversion. There are other considerations when completing a Roth conversion that are beyond RMDs, so talk with your advisor to make sure you’re a good candidate before initiating one.

The second way to avoid taking RMDs is by continuing to work. If you’re not ready to retire by age 73 (or age 75 for some) and you still work for an employer where you have a retirement plan, you don’t have to take RMDs from that plan yet (as long as you don’t own more than 5% of the company where you work). And if continuing your full-time working years isn’t appealing, you may still be able to qualify for this exception as a part-time employee. Just remember that this only applies to the plan with the employer you’re currently working for, as plans with former employers (or any IRA accounts) are not eligible for this deferral.

5. Do the RMD rules apply to inherited IRAs?

Many beneficiaries of IRAs must empty their inherited account within 10 years of the decedent’s death – and in some cases, take taxable RMDs for the first nine years. These rules, however, vary based on factors like your relation to the decedent, when you inherited the IRA and more.

6. How can I reduce the tax cost of my RMDs?

If you find yourself to be charitably inclined and would like to reduce the tax cost of your RMDs, you can take advantage of QCDs (qualified charitable distributions). These donations are non-taxable distributions of up to $105,000 paid from your IRA directly to a qualified charity – and they can count as your RMD.