If you’re approaching your 70s or are already retired, you’ve possibly heard about required minimum distributions (RMDs) — or will soon.
While the concept may seem straightforward, RMDs involve important timing decisions, tax implications, and strategic opportunities that can significantly impact your retirement income and overall financial plan. At Premier Financial Group, we believe that education leads to confidence, and the more you understand about RMDs, the better equipped you’ll be to make decisions that align with your goals.
Here’s what you need to know.
RMD Essentials
What are RMDs and Who Needs to Take Them?
RMDS are mandatory withdrawals from your retirement accounts that the IRS requires once you reach a certain age.
Currently, RMDs begin at age 73 for traditional retirement accounts. This age requirement has changed over time — it was previously 70½, then 72, and now 73. Looking ahead, it’s scheduled to increase again to 75 in 2033. These changes reflect shifting retirement patterns as Americans continue to work longer.
RMDs apply to all qualified retirement accounts, including traditional IRAs, 401(k) plans, and 403(b) plans. The notable exception is Roth accounts or retirement accounts funded with after tax money, which do not have required distributions. This is one of the significant advantages of Roth accounts — the flexibility to withdraw funds on your own schedule or potentially leave them to heirs tax-free.
An Important Exception for Employer Plans
If you’re age 73 or older and still working, you may not need to take RMDs from your current employer’s retirement plan just yet.
The IRS waives RMDs from employer-sponsored retirement plans (like 401(k)s or 403(b)s) if all the following apply:
- You’re still actively employed by the company that sponsors the plan
- You are not a 5% or greater owner of the company
- The plan allows for this delay (most do, but it’s best to confirm)
This exception only applies to the employer plan at your current job — it doesn’t apply to IRAs or old 401(k)s from previous employers.
It’s one reason why some people choose to continue working (or “working”) well into their 70s — delaying RMDs can be a strategic tax move.
Key Deadlines
Timing is crucial when it comes to RMDs. For your first withdrawal, you have two options: take it by December 31 of the year you turn 73, or delay until April 15 of the following year.
However, delaying your first RMD comes with a significant caveat: You’re taking an RMD for the previous year, but still have to take an RMD for the current year. This means you’d be taking two required distributions in the same tax year, potentially pushing you into a higher tax bracket and possibly increasing your Medicare premiums which may reduce your Social Security benefits.
After your first RMD, all subsequent distributions must be taken by December 31 each year.
Calculation and Tax Implications
How RMDs are Calculated
The IRS has a specific formula for calculating your Required Minimum Distribution. The calculation is relatively straightforward: the value of your retirement account as of December 31 of the previous year, divided by a life expectancy factor provided by the IRS.
The IRS maintains life expectancy tables that assign a factor based on your age. For example, at age 73, the uniform lifetime table factor is approximately 27.1. If your IRA was worth $500,000 on December 31 of the previous year, your RMD would be about $18,450 ($500,000 ÷ 27.1).
Each year, the life expectancy factor decreases, which means you’ll generally need to withdraw a higher percentage of your account as you get older. If your investments grow significantly, your RMD amount will also increase, as it’s based on the account’s value at the end of the previous year.
There are actually three different life expectancy tables the IRS maintains:
- The Uniform Lifetime Table (most commonly used)
- The Single Life Expectancy Table (for non-spouse beneficiaries of the IRA owner)
- The Joint Life and Last Survivor Expectancy Table (for married couples with age differences of 10 years or more)
The tax implications of calculated RMDs can be complex. The team at Premier keeps clients well-informed, walking them through these calculations and helping them understand how RMDs fit into broader tax and financial strategies.
Tax Treatment of RMDs
All RMD withdrawals from traditional retirement accounts are taxed as ordinary income in the year you take them. This means they’ll be taxed at your current federal income tax rate, plus applicable state income taxes.
This can have significant implications for your overall tax situation. A large RMD could push you into a higher tax bracket, especially if you have other sources of income such as Social Security, pension payments, or investment income.
The state you live in also impacts the tax treatment of RMDs. If you reside in a state with no income tax like Florida, Washington, or Nevada, you’ll only pay federal income tax on your distributions.
Impact on Other Retirement Benefits
RMDs can trigger a cascade of other financial effects beyond just income taxes. They can affect:
- Medicare Premiums: Higher income from RMDs can increase your Medicare Part B and Part D premiums through what’s called Income-Related Monthly Adjustment Amounts (IRMAA). These surcharges are based on your modified adjusted gross income from two years prior.
- Social Security Taxation: Increased income from RMDs might cause a larger portion of your Social Security benefits to become taxable, effectively reducing your net benefits.
Consequences of Missing RMDs
The IRS takes RMD requirements seriously, and the penalties for non-compliance can be substantial. Failing to take your full RMD by the deadline may result in a 25% excise tax on the amount not distributed as required, or 10% if a correction is withdrawn within two years.
Remember that while financial institutions may send reminders and advisors or accountants may help you calculate the amounts, the responsibility for taking RMDs ultimately falls on you.
Prevent missing deadlines by:
- Setting calendar reminders
- Submit your distribution request well before the year-end rush
- Consider automatic distributions
- Maintain documentation of all your RMD calculations and withdrawals
- Work with a financial advisor to help ensure you meet all requirements and deadlines
At Premier, advisors document discussions and maintain detailed records, proactively monitoring deadlines and working collaboratively to ensure nothing falls through the cracks.
Take Control of Your RMD Strategy
Understanding required minimum distributions is essential for confident retirement planning. Premier Financial Group is committed to educating our clients because informed decisions lead to greater financial peace of mind.
Our experienced advisors understand the intricacies of RMD planning and can help you develop a personalized strategy that aligns with your goals. Whether you need help calculating your required distributions, exploring Roth conversion opportunities, or coordinating RMDs with your broader financial plan, we’re here to guide you through every step of the process.