As we approach the end of the year, it’s time to revisit one of the most important retirement planning tasks: Required Minimum Distributions, or RMDs. If you’re age 73 or older and have a traditional IRA, 401(k), or other tax-deferred retirement account, the IRS requires you to withdraw a minimum amount annually. Missing this deadline can result in steep penalties—so let’s make sure you’re on track.
What Are RMDs?
RMDs are the government’s way of ensuring that taxes are eventually paid on retirement savings. When you contribute to tax-deferred accounts, you postpone paying taxes until you withdraw the money. These withdrawals are calculated based on your account balance and life expectancy. Starting at age 73, the IRS says it’s time to start taking those withdrawals—whether you need the money or not.
Why Do RMDs Exist?
The IRS allows retirement accounts to grow tax-deferred for decades, but it doesn’t let that last forever. RMDs are designed to:
- Trigger taxable income from retirement accounts
- Prevent indefinite tax deferral
- Ensure retirement funds are used during retirement
Do You Need to Take One?
You’re required to take an RMD if:
- You’re age 73 or older
- You own a traditional IRA, SEP IRA, SIMPLE IRA, or 401(k)
- You’re no longer working (for 401(k)s tied to your employer)
Roth IRAs are exempt during the account holder’s lifetime, but inherited Roth IRAs may have RMD requirements.
Key Deadlines
Most Required Minimum Distributions (RMDs) must be taken by December 31 each year to avoid penalties. However, if this is your first year of eligibility—meaning you turned 73 this calendar year—you have the option to delay your initial RMD until April 1 of the following year. While this extension can offer short-term flexibility, it’s important to note that delaying means you’ll end up taking two RMDs in one year, which could significantly increase your taxable income and potentially push you into a higher tax bracket. Planning ahead can help you decide which timing strategy best fits your financial situation.
Strategies to Optimize Your RMD
- Qualified Charitable Distributions (QCDs): Donate directly from your IRA to a qualified charity to satisfy your RMD and reduce taxable income
- Strategic Withdrawals: Consider which accounts to draw from first based on growth potential and tax impact
- Tax Planning: Coordinate with your advisor to manage the potential impact to your tax bracket and avoid Medicare surcharges
RMDs aren’t just a year-end chore—they’re a key part of your retirement income strategy. If you haven’t taken yours yet, now’s the time to act. Our team at LIS is here to help you calculate your RMD, explore tax-smart strategies, and make sure you meet the deadline with confidence.