You may have spent decades saving in a 401(k), IRA, 403(b), or other pre-tax retirement plan because the deduction helped during your working years and the money could grow without annual income tax along the way.
At age 73, the IRS generally requires you to begin taking a portion of that money out each year. The withdrawal is called a required minimum distribution, or RMD, and it is usually taxable as ordinary income.
Why RMDs Exist
Pre-tax retirement accounts defer income tax; they do not eliminate it. The IRS eventually requires distributions to begin rather than allowing the full account to remain sheltered indefinitely.
Each year, the calculation starts with the value of the retirement account on the previous December 31. That balance is divided by an IRS life-expectancy factor based on your age. The result is the minimum amount that must be withdrawn for the year.
Most custodians will calculate and report the RMD for each account they hold, so you generally do not have to run the calculation yourself. Understanding how the amount is determined still helps you plan for the tax impact and decide where the distribution should go.
Your First RMD May Have Two Timing Choices
Required minimum distributions begin at age 73. Your first distribution can generally be taken during the year you turn 73, or delayed until April 1 of the following year. Every RMD after the first one must be completed by December 31 of the applicable year.
The April deadline can create an important planning decision. Delaying the first RMD means you will also need to take your second RMD by December 31 of that same following year. Two taxable distributions can land in one calendar year.
That result is often less appealing for someone whose income is steady or rising. For some retirees, however, delaying the first RMD moves the income out of a final high-earning year and into a lower-income retirement year.
One client retired in the year he turned 73 after a career that included several employers. Over time, he had consolidated former 401(k) accounts into a rollover IRA. His final year of salary still placed him in the 35% federal tax bracket.
We modeled the option to delay his first RMD until the following April, then take both the delayed distribution and his age-74 RMD in the same calendar year. By then, his salary had ended. Our projections showed that even with both required distributions, his income would fall into the 12% federal tax bracket.
Delaying the first RMD by four months reduced his overall tax cost because it moved the taxable income out of his final high-income working year. The same approach would not fit every retiree, which is why we test the timing against the full tax picture before the deadline arrives.
An RMD Does Not Tell You How to Use the Money
Some people use their RMD for spending. Others move it into a taxable investment account so it can remain invested. Clients age 70½ or older may also use a qualified charitable distribution, or QCD, to send eligible IRA dollars directly to qualified charities. A QCD can satisfy all or part of an RMD without increasing adjusted gross income.
A retired couple we work with preferred a steady monthly deposit into checking, much like the income rhythm they had known before retirement. We coordinated which accounts would provide the RMD dollars and which taxable accounts would supplement the rest of the monthly amount, so instead of deciding each month which account to use, the couple received one coordinated deposit schedule built around their spending needs.
Other clients prefer a single annual distribution. They may send the full RMD to checking, transfer it to a taxable investment account, or complete it early in the year so the obligation is handled and off the list.
For clients taking an RMD as a lump sum, we often consider distributing later in the year rather than automatically in January. The required amount is already set by the prior December 31 balance, but leaving the assets in the IRA longer gives them more time to remain invested, continue growing tax-deferred, and keep generating dividend and interest income that stays sheltered from tax until the distribution actually occurs. Markets have historically spent more years rising than falling, even though any single year can move either way. Timing should still follow the client’s cash needs, tax plan, and comfort with market exposure.
RMDs Affect More Than Your Tax Return
An RMD can raise taxable income, affect Medicare Part B and Part D premiums through IRMAA, and change how much of Social Security is taxable. It may also affect estimated tax payments, withholding, charitable planning, and the amount of cash available for spending or reinvestment.
For families with several retirement accounts, employer-plan rules and account-specific distribution requirements can add another layer of administration. We use a coordinated annual review to clarify where the distribution should come from, how taxes will be paid, and whether part of the withdrawal should remain invested outside the retirement account. Our advisory team, where every advisor holds the CFP® certification or is an active candidate in the CFP® certification program, brings that training directly to weighing an RMD against Medicare thresholds, Social Security taxation, and the rest of a household’s tax picture in the same year.
Richard P. Slaughter Associates has been fee-only and fiduciary since 1991. We help families coordinate required distributions with retirement income, tax planning, Medicare exposure, charitable goals, and the rest of the balance sheet.
If any of this resonates — whether you are approaching age 73, deciding when to take a first RMD, or looking for a better way to coordinate required distributions with your retirement income — we would welcome a conversation.
CFP Board owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
