For many retirees, years of saving in tax-deferred accounts eventually lead to a question: how and when to take that money out. Required minimum distributions, or RMDs, are annual withdrawals required from most pre-tax retirement accounts once you reach a certain age, and they can influence taxable income, Medicare premiums, and how a portfolio is drawn down. Understanding the rules and how they fit your broader plan may help you approach the first withdrawal with greater clarity.
What Are the Key RMD Rules, Including Age, Accounts, and Deadlines?
Under the SECURE 2.0 Act (Setting Every Community Up for Retirement Enhancement), your starting age now depends on your birth year:
– Age and deadlines: RMDs generally begin at age 73 for those born between 1951 and 1959, and at age 75 for those born in 1960 or later. The first is due by April 1 of the following year and later ones by December 31, so delaying the first means two distributions in one year, which may raise your bracket.
– Accounts affected: Traditional and rollover Individual Retirement Accounts (IRAs) and employer plans such as 401(k), 403(b), and the traditional Thrift Savings Plan (TSP). Roth IRAs, Roth 401(k)s, and Roth TSP balances generally do not require lifetime RMDs, and a current employer’s plan may allow a delay until you leave the job, except for 5 percent owners.
– How it works: The amount is generally your prior year-end balance divided by an IRS life expectancy factor, and a missed RMD may trigger an excise tax.
How Do RMDs Affect Your Taxes, Medicare Premiums, and Social Security?
RMDs from pre-tax accounts are generally taxed as ordinary income, but the withdrawal itself is rarely the whole story. Because it arrives on top of pensions, Social Security, and other income, an RMD can raise your bracket, increase the portion of Social Security benefits subject to tax, and push income past the thresholds that trigger higher Medicare premiums. These surcharges, known as the Income-Related Monthly Adjustment Amount (IRMAA), are based on income from two years earlier, so decisions made today can affect premiums later.
Federal employees may see a Federal Employees Retirement System (FERS) pension, Social Security, and TSP withdrawals land in the same year, while business owners and executives may be managing an RMD alongside sale proceeds or deferred compensation. Because RMDs are predictable, they can be projected years in advance and planned around rather than simply absorbed.
How Can You Plan Around RMDs Before They Begin?
The years between retirement and your starting age may often offer the most flexibility. Paychecks have usually stopped, but RMDs and, in some cases, Social Security have not yet begun, so taxable income may be lower than it will be later. Many retirees use this window to think in terms of lifetime taxes rather than a single year. A few approaches commonly evaluated:
– Roth conversions and Social Security timing: Converting pre-tax assets in lower-income years, such as while delaying Social Security, may reduce future RMDs and smooth taxable income, though each conversion is taxable and may affect Medicare premiums.
– Charitable giving: IRA owners age 70½ or older may send funds directly to charity through a qualified charitable distribution (QCD), which can count toward the RMD without being included in taxable income. Because QCDs can only come from IRAs, some retirees weigh moving 401(k) or TSP balances to an IRA against cost and investment options.
– Timing of other income: A business sale, deferred compensation payout, or equity compensation event can compound an RMD year, so timing may be worth coordinating.
– Rebalancing and account location: RMDs can be a natural opportunity to rebalance by drawing from overweight positions, and taking the distribution in kind, as securities rather than cash, may help avoid selling after a decline. Withdrawal order across account types can also influence income and capital gains.
How Can Your Financial Beliefs Influence RMD Decisions?
RMDs often arrive after decades of building and protecting wealth, and being required to draw it down can conflict with long-held beliefs about money, often called money scripts. Some retirees lean toward caution and take only the minimum, while others react to market swings by selling at inopportune times.
Deciding in advance whether an RMD will be spent, gifted, or reinvested, and which accounts and investments will fund it, may reduce the pressure to decide in the moment. RMD years are also a natural point to revisit spending, gifting, and legacy goals together.
How Do RMDs Fit Into Estate and Legacy Planning?
Pre-tax accounts left to heirs carry income tax, and many non-spouse beneficiaries must empty an inherited account within 10 years, often during their own peak earning years. For that reason, some families consider leaving Roth assets to heirs, who may be able to withdraw them income tax free, and directing pre-tax assets to charity, which may be more tax-efficient. Reviewing beneficiary designations alongside these choices belongs in your broader estate plan.
If you are approaching your first RMD or want to review your current distributions, we invite you to reach out to our team to start the conversation.