Navigating RMDs: What to Know for Your Retirement

As you approach retirement, you’ve likely spent decades saving and investing to build your nest egg. But did you know that once you reach a certain age, the IRS requires you to start taking money out of your retirement accounts?

These mandatory withdrawals are known as Required Minimum Distributions (RMDs), and understanding them is essential to managing your retirement finances wisely.

At Advance Capital Management, we help people create retirement plans that factor in every aspect, so we understand that when it comes to withdrawing money, the rules can be confusing. That’s why we’re here to help you make sense of it all.

Let’s break down what you need to know about RMDs – what they are, how they work and how you can plan for them to ensure you’re on the right track.

What are RMDs?

RMDs are mandatory withdrawals that you must take from your retirement accounts once you reach a specific age.

Currently, RMD age is 73, with an increase to 75 scheduled for 2033.

The idea behind RMDs is simple: the government wants to ensure that it eventually collects taxes on the money you’ve been saving in tax-deferred accounts like traditional IRAs, 401(k)s, and other similar retirement plans.

Starting in the year you turn 73, you must begin taking these distributions annually. The amount you need to withdraw is based on your account balance at the end of the previous year and your life expectancy, as determined by IRS tables found here.

The IRS updates these tables periodically, so it's important to stay informed about any changes.

Why do RMDs matter?

Failing to take your RMDs or not taking the correct amount can result in significant penalties. If you miss the deadline or don’t withdraw enough, you could face a hefty penalty of 25% of the amount you were supposed to withdraw but didn't. That said, if you correct the issue by taking your full withdrawal, the IRS may lower the penalty to 10%.

Beyond avoiding penalties, managing your RMDs effectively can also help you minimize taxes and optimize your retirement income. For some, RMDs may not be a major concern because they’re already withdrawing more than the minimum to cover living expenses.

However, for those who don’t need to withdraw a lot to fund their retirement, carefully planning your RMD strategy can make a big difference in how much you keep versus how much you pay in taxes.

How to plan for RMDs

Here are some steps you can take to manage your RMDs more effectively:

Know Your Timeline: The first RMD must be taken by April 1 of the year following the year you turn 73. After that, you’ll need to take your RMD by December 31 each year. If you delay your first RMD until April 1, you’ll have to take two distributions in that year, which could increase your taxable income significantly. Planning ahead can help you avoid an unexpected tax bill.

Calculate Carefully: Each retirement account requires its own RMD calculation, but you have the flexibility to withdraw the total amount from one or more accounts. This can be advantageous if you have multiple accounts with different investment strategies. However, make sure you calculate accurately to avoid any mistakes. As with RMDs in general, this is one particular area where a financial adviser can provide guidance.

Consider Your Tax Situation: RMDs are considered taxable income, so it’s important to think about how they’ll impact your overall tax situation. You might want to consult a tax adviser to explore strategies that could help reduce your tax burden.

Think About Charitable Giving: If you’re charitably inclined and don’t need all the income from your RMDs, a Qualified Charitable Distribution (QCD) might be a great option. The transfer is excluded from your income and, if done correctly, counts toward your RMD. A QCD allows you to donate up to $100,000 directly from your IRA to a qualified charity without having to count the distribution as taxable income. This strategy can be especially beneficial if you’re already planning to give to charity.

Strategize for Inherited Accounts: If you’ve inherited a retirement account, the rules can get more complicated. Non-spousal beneficiaries, for example, are generally required to deplete the account within 10 years of the original owner's death. It’s important to understand the specific rules that apply to your situation and plan accordingly to avoid unnecessary taxes. Learn more about inherited IRAs here.

Stay Organized: Keep track of all your retirement accounts and make sure you understand the RMD requirements for each. Many financial institutions offer tools and calculators to help you estimate your RMDs, or you can work with a financial adviser to create a tailored strategy.

Bottom line

Managing your RMDs isn’t just about complying with IRS rules; it’s also about making the most of your retirement savings. By planning ahead, you can ensure that you’re taking the right steps to preserve your wealth, minimize taxes and maximize your retirement income.

If you have any questions or need assistance with your RMD strategy, don’t hesitate to reach out. Schedule a free financial consultation with an adviser right now!

We’re here to help you navigate the complexities of retirement planning and pursue your financial goals with confidence.