Required Minimum Distributions (RMDs): How to Plan Ahead
For decades, a traditional IRA or 401(k) lets savings grow without annual tax. Eventually, though, the IRS requires you to start taking money out. Required minimum distributions, or RMDs, are the annual withdrawals the tax code requires from most tax-deferred retirement accounts once you reach the required beginning age.
RMDs are taxed as ordinary income, and for people with large retirement balances they can push taxable income higher than expected for the rest of their lives. The good news is that much of the planning can happen years before the first distribution. This guide explains the RMD rules at a general level and the strategies worth discussing while you still have time to act.
Start Here: A Complimentary Retirement Wealth and Tax Review
RMD planning starts with knowing what your future distributions may look like. Compound offers a complimentary, no-obligation retirement wealth and tax review that may include:
Projected RMDs: an estimate of future distributions based on your balances and assumptions
Your tax picture in retirement: Social Security, pensions, investment income, and RMDs combined
Roth conversion opportunities: years when converting may be worth evaluating
Charitable and legacy goals: how giving and beneficiary planning connect to your accounts
Request your complimentary review.
RMD Rules: How Required Minimum Distributions Work
The rules are detailed and have changed several times in recent years, so the specifics should always be confirmed for your situation. At a general level:
Which accounts are covered. RMDs generally apply to traditional IRAs, SEP and SIMPLE IRAs, and employer plans such as 401(k)s and 403(b)s. Roth IRAs do not require distributions during the original owner's lifetime, and under current law designated Roth accounts in employer plans generally no longer require lifetime distributions either.
When they start. Distributions begin at the required beginning age set by law. That age has been raised more than once, and it depends on your birth year, so check the current rule rather than relying on what a parent or friend experienced.
First-year timing. Your first RMD may generally be delayed until April 1 of the following year, but doing so means taking two distributions in the same tax year.
How the amount is calculated. Each year's RMD is generally based on the prior year-end account balance divided by a life expectancy factor from IRS tables.
Multiple accounts. IRA RMDs can generally be totaled and taken from any one or more of your IRAs. Employer plan RMDs are generally calculated and taken separately for each plan.
Still working. If you are still employed and not a significant owner of the company, you may be able to delay RMDs from your current employer's plan until you retire.
Missed distributions. An excise tax applies to amounts not withdrawn on time, which may be reduced if the shortfall is corrected promptly.
Inherited accounts follow separate rules. Many non-spouse beneficiaries must empty an inherited account within a set number of years, and some must also take annual distributions during that period.
Why RMD Planning Matters for Your Wealth and Taxes
RMDs are not just a tax issue. They affect your whole retirement plan:
Higher brackets. Large distributions stacked on Social Security and investment income may move you into a higher bracket.
Medicare premiums. Higher income may increase Medicare Part B and Part D premiums through income-related adjustments.
Taxation of Social Security. More income may cause a larger portion of Social Security benefits to be federally taxable.
Portfolio management. Distributions must come from somewhere. Deciding which holdings to sell, and whether to reinvest money you do not need in a taxable account, is an investment decision as much as a tax one.
Legacy. Heirs who inherit large tax-deferred balances may face compressed distribution timelines during their own peak earning years.
RMD Planning Strategies Worth Discussing
Roth conversions before RMDs begin
The years between retirement and the required beginning age are often lower-income years. Converting part of a traditional IRA to a Roth IRA in those years means paying tax now, but it may reduce future RMDs and leave heirs a tax-free account. Read more about how to evaluate a pretax to Roth conversion strategy, and how some investors pair Roth conversions with real estate losses.
Strategic early withdrawals
Taking modest distributions before they are required, to fill lower brackets, can sometimes smooth taxable income over retirement rather than concentrating it later.
Qualified charitable distributions
Eligible IRA owners who give to charity may be able to make qualified charitable distributions directly from an IRA. These can count toward the RMD while being excluded from taxable income, subject to annual limits and specific rules.
Coordinating real estate and other income
For investors with rental property, depreciation and other deductions may interact with distribution planning. See whether you can lower RMDs using real estate.
Beneficiary planning
Reviewing beneficiary designations, and which heirs inherit which types of accounts, can help align your accounts with your estate plan. Coordinate those decisions with your estate attorney.
See the Bigger Picture
Use the Compound calculator to explore how hypothetical savings may grow over time under different assumptions. Results are hypothetical and for illustration only, but they can help show why the size of tax-deferred balances, and the eventual RMDs on them, deserve attention early.
Coordinated RMD Planning in Wisconsin
RMD decisions touch investments, taxes, Social Security, Medicare, charitable giving, and estate planning at once. Compound brings wealth management and tax planning and preparation together, so distribution planning can be part of one retirement strategy. Compound works with retirees and pre-retirees throughout Wisconsin, including Milwaukee, Madison, Waukesha, Green Bay, Appleton, Racine, and Janesville, and in surrounding areas. For related reading, see our guide to retirement planning in Wisconsin.
Approaching retirement? Request a complimentary retirement wealth and tax review.
Frequently Asked Questions
What are required minimum distributions?
Required minimum distributions are annual withdrawals the tax code requires from most tax-deferred retirement accounts once you reach the required beginning age. They are generally taxed as ordinary income.
When do RMDs start?
RMDs begin at the required beginning age set by law, which has changed in recent years and depends on your birth year. Your first RMD may generally be delayed until April 1 of the following year.
Do Roth IRAs have RMDs?
Roth IRAs do not require distributions during the original owner's lifetime. Beneficiaries who inherit a Roth IRA are generally subject to distribution rules.
How can I reduce my RMDs?
Strategies to discuss include Roth conversions before RMDs begin, earlier withdrawals in lower-income years, and qualified charitable distributions for eligible individuals. The right approach depends on your full financial picture.
What is RMD planning?
RMD planning is projecting future required distributions and coordinating withdrawals, Roth conversions, charitable giving, and investments to help manage taxes over retirement.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Diversification does not ensure a profit or protect against loss. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
About Compound Wealth
Compound Wealth works with business owners, entrepreneurs, professionals, and families with increasingly complex financial lives. The firm brings together tax planning, wealth management, client accounting services, and business transition advisory to provide a coordinated planning experience. By evaluating multiple aspects of a client's financial picture together, planning discussions may become more structured and aligned with long-term goals.
