It’s Required Minimum Distribution season and there are some important elements to understand before calculating and withdrawing funds from your IRA accounts.
Throughout your career, you deferred taxes by putting money into your IRA or 401(k) accounts and now the time has come to pay the taxes. Your broker or financial advisor can help you calculate and withdraw this distribution.
Your first RMD is generally when you turn 73. (If you were born on or after January 1, 1960, your first RMD is at age 75.) Figure I illustrates the RMD age for account owners.
The RMD is the amount that you must withdraw from your tax deferred retirement accounts. RMDs are generally determined by dividing the account value as of December 31st of the previous year by the life expectancy distribution period of the calculation year as illustrated in Figure II.
It’s important to remember that your first RMD is due April 1st of the year after you reach RMD age. But be careful – if you defer your first withdrawal, you will have to take two RMDs in that year. Only do this with careful thought and planning with your advisor.
*Note: Your RMD calculation will be a little different if your sole beneficiary is a spouse who is more than 10 years younger than you. If this is the case, then you are required to use Table II (Joint Life and Last Survivor Expectancy) in Appendix B as shown in the IRS Publication 590-B (2024) (“Distributions from Individual Retirement Arrangements (IRAs)”). For the most part, this will result in a smaller RMD calculation than you would otherwise have.
You calculate your RMD by dividing your account balance at the end of the previous year by the joint life and last survivor expectancy from Table II.
For example: You have a traditional IRA with an account balance of $100,000 at the end of 2024. Your spouse, who is the sole beneficiary of your IRA, is 11 years younger than you. You turn 75 in 2025, and your spouse turns 64. You would use Table II. Your joint life and last survivor expectancy is 25.3, making your RMD for 2025 $3,953 ($100,000 ÷ 25.3). Source
Taking More than the Minimum
You may take more than the minimum requirement. Using these accounts for income or covering large expenses is an important part of many people’s financial plan. You may be concerned about what the IRS might say, but do not worry. While the IRS requires a minimum withdrawal, they cannot tell you what your budget needs are or what your portfolio can sustain.
What You Can Do with this Money
Once you withdraw the money from the account, it’s just your money! You can do whatever you like. Spend it, save it, give it away! If you want to keep the money invested, move the cash to a taxable brokerage account (like an individual or joint account) and reinvest there. It can’t stay in the IRA.
Taking Less
If you decide not to take the minimum or more than the minimum, it’s most important to avoid taking funds below the minimum requirement. Leaving your RMD in the account may result in an up to 25% penalty tax on the amount not distributed. There are several ways to satisfy the RMD but simply moving it into another IRA or rolling one deferred account into another does not satisfy the RMD.
While you can still convert your IRA to a Roth IRA, this does not satisfy the RMD either. If you are still working, you may be eligible to contribute to your IRA – this is allowed, but you must still take your RMD (as will be explored later).
Taxation
You’ve used this account to reduce your taxes in the past, and the IRS wants its cut. Withdrawals are taxable income that can push you into a higher bracket, raise Medicare premiums, and affect Social Security taxation. But if you don’t need the money, and want to send it to charity instead, you may be able to make significant savings with Qualified Charitable Distributions (QCD).
Charitable Giving
With the current standard deduction, fewer than 10% of tax returns are able to deduct charitable gifts. Qualified Charitable Distributions (QCDs) satisfy your RMD while excluding the gift from your adjusted gross income. If you do not itemize your deductions, you may be able to lower your taxes and still take advantage of the higher standard deduction. The money must go directly from the IRA to charity - work with your custodian or advisor to get this right. Figure III illustrates.
Withdrawals from a pre-tax IRA, including your RMD, generally count towards your adjusted gross income (AGI). You are taxed on your AGI minus your deductions. If you do not itemize your deductions, you can reduce your AGI with a Qualified Charitable Distribution and still use the generous standard deduction. This reduces your taxable income and your total taxes owed.
Multiple retirement accounts
If you have multiple IRAs, you may be able to withdraw the total RMD from a single IRA. You must calculate the RMD for each eligible account. However, for 401(k)s and 457(b)s, you must take the RMD from each account.
You may want to consolidate IRAs and other retirement accounts BEFORE the year you must begin taking RMDs to simplify the process.
Inherited IRAs
Beneficiary IRAs have more complex tax rules. If you inherit from a spouse, you can treat the account as your own. If you inherit from anyone else, in most cases, you must withdraw the account within 10 years and take RMDs each year until then. It is important to both follow the rules and honor the memory of the person who left you an IRA.
Thinking about distributions and taxes for your heirs is a big part of estate planning. Make sure that you review your beneficiaries as part of this process.
Avoid RMDs with Roth Conversions
Plan ahead to avoid RMDs with Roth conversions. Your Roth IRA is not subject to RMDs. Distributions to you or your beneficiaries are not taxable. By converting your pre-tax IRA to a Roth IRA, you will not have to take the RMD out. The conversion does count as taxable income, but this could potentially generate tax savings in the future. This requires careful planning as shown in Figure IV.
You must satisfy your RMD before you can convert any additional funds. If you don’t, the funds can’t be converted to a Roth account where it would be tax free. This can be a big benefit to your beneficiaries who may face steep distributions in some of their highest earning years.
