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Required Minimum Distributions (RMD) Rules: Key Things Every Retiree Should Know Thumbnail

Required Minimum Distributions (RMD) Rules: Key Things Every Retiree Should Know

As retirees approach the golden years, understanding Required Minimum Distributions (RMDs) is essential for tax planning and maintaining a well-structured retirement strategy. Here’s a breakdown of key considerations for RMDs in 2025 and beyond:

1. What Are RMDs? RMDs are mandatory withdrawals that retirees must take from most tax-deferred retirement accounts, such as Traditional IRAs, 401(k)s, and SEP IRAs. The IRS requires these withdrawals to ensure taxes are paid on retirement savings that have grown tax-deferred.

  • Starting Age: As of 2024, RMDs begin when you turn 73 (and will increase to 75 for individuals born in 1960 or later).
  • Calculation: RMD amounts are based on your retirement account balance as of December 31 of the previous year and your life expectancy.
  • Flexibility: While you must withdraw the funds, you aren’t required to spend them. You can reinvest RMD proceeds in a taxable account to continue growing your wealth.

2. Skipping RMDs Can Be Costly: Failing to take your RMD comes with significant penalties.

  • Penalty: You’ll owe 25% of the amount you didn’t withdraw (reduced to 10% if corrected promptly).
  • Example: If your RMD is $10,000 and you don’t take it, you’ll face a penalty of $2,500, in addition to still paying income taxes on the $10,000.

💡 Tip: Avoid penalties by ensuring you meet the RMD deadlines. The first withdrawal is due by April 1 of the year after you turn 73, and subsequent RMDs are due by December 31 each year.  We will help you manage your RMD requirements.

3. Which Accounts Require RMDs?

  • Subject to RMDs: Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s.
  • Not Subject to RMDs: Roth IRAs (unless inherited). However, Roth 401(k)s are now exempt from RMDs starting in 2024 under SECURE 2.0.

4. RMDs and Tax Planning: RMDs can disrupt careful tax planning, especially when it comes to managing taxable income levels.

  • Consider spreading withdrawals over multiple years.
  • Coordinate RMDs with charitable giving strategies, such as Qualified Charitable Distributions (QCDs) for IRA owners over 70½.
  • Impacts on Income: RMDs can push you into a higher tax bracket, make your Social Security benefits taxable, or disqualify you from income-based programs like Medicaid subsidies.
  • Market Surges: A strong market year can increase your account balance, leading to higher RMDs and unexpected tax implications.

💡 Tip: We can work with you to create a flexible tax strategy that accounts for variable RMD amounts.

5. Ways to Reduce or Avoid RMDs: With proactive planning, it’s possible to minimize or avoid RMDs altogether.

  • Strategic Withdrawals
    • Make extra withdrawals before RMDs begin. By withdrawing funds in lower-tax years, you reduce your account balance, which in turn reduces future RMD amounts. Take advantage of the low tax bracket years. 
  • Roth Conversions
    • Convert tax-deferred retirement funds to a Roth IRA, where withdrawals are tax-free, and there are no RMDs during your lifetime.
    • Timing: Consider converting during years when your taxable income is lower to minimize the tax impact of the conversion.
  • Qualified Charitable Distributions (QCDs)
    • If you’re over 70½, you can donate up to $105,000 directly from your IRA to a charity. The donation counts toward your RMD but isn’t included in your taxable income.
  • When to Take Your First RMD
    • The first RMD is due by April 1 of the year after reaching your RMD age.
    • Subsequent RMDs must be taken by December 31 each year. Taking two RMDs in the same tax year could increase your taxable income significantly.

6. Keep Track of Beneficiary Accounts

  • Inherited IRAs have separate RMD rules, with non-spouse beneficiaries typically required to withdraw all funds within 10 years of inheritance.
  • Spouse beneficiaries may roll inherited accounts into their own IRAs, deferring distributions until their RMD age.

Final Thoughts

RMDs are a necessary part of retirement planning, but they don’t have to derail your financial goals. With careful tax planning, you can manage their impact and even use them as an opportunity to align your money with your retirement priorities.

Ready to take control of your RMD strategy? Let Birch Street Financial Advisors guide you. Reach out to us today to discuss how we can help optimize your retirement plan.