Key Points
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Don’t be late taking your RMD, as the penalty is severe.
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Think through the tax implications of your RMDs.
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There are some moves you might make to reduce your tax bill with RMDs.
Anyone who is (sensibly!) socking money away for retirement in tax-advantaged retirement accounts such as IRAs and 401(k)s should learn more about Required Minimum Distributions (RMDs). That’s because some forms of these accounts require you to be making certain withdrawals on a certain schedule — and if you fail to do so, a severe penalty may result.
Specifically, we’re required to take RMDs annually from traditional IRAs, SEP IRAs, and SIMPLE IRAs once we reach age 73. (RMDs are not a feature of Roth IRAs and Roth 401(k)s for the original owners of the accounts.)
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It’s smart to consider RMDs in the context of your various retirement accounts and income sources, and to make moves that minimize your tax bill. For starters, know that your RMD will count as taxable income to you, so it will likely increase your tax bill and may even push you into a higher tax bracket.
Note, too, that you have until April 1 of the year after you turn 73 to take your first RMD. After that, though, the deadlines fall on Dec. 31. So your second RMD will be due on Dec. 31 of the year you turn 74.
Also, the penalty for failing to take your RMD on time is 25% of the amount you failed to withdraw. (You may be able to pay a smaller penalty if you take action soon after missing the deadline.)
Back to taxes. Here are some strategies to consider:
- Make early withdrawals from your accounts featuring RMDs to shrink your future RMDs. You can start doing so at age 59 1/2, without penalties. This strategy may also help you delay claiming your Social Security benefits, which will make them bigger.
- Combine your RMD with a Roth IRA conversion. The conversion is when you take money from a traditional IRA (which’s subject to RMDs) and move it into a Roth IRA (where it won’t be). Roth IRAs allow you to take money out tax-free in the future, if you play by the rules. The amount you convert is taxed, though, so it will likely increase your tax bill. You might use your RMD to pay that tax, though. You might also apply a new senior tax deduction of up to $6,000 to that tax bill, too.
- Alternatively, transfer some or all of your RMD directly from a traditional IRA to a qualifying charity — via a Qualified Charitable Distribution (QCD). That will still count toward your RMD and will not cost you anything in taxes. (This isn’t allowed with 401(k)s, but you could convert that money to an IRA first.)
- Use the right lifetime expectancy table. If you’re at least 10 years older than your spouse, who is also the sole beneficiary of your retirement account, you can use the “Joint and Last Survivor Life Expectancy” table to calculate your RMDs. This will let you use your spouse’s life expectancy, which can result in lower RMDs.
Spend some time learning about RMDs and thinking about how you might best take them.
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