Required minimum distributions, or “RMDs,” generally begin at age 73 for traditional IRA owners. Your first RMD is for the year you turn 73, though you may be able to delay taking it until April 1 of the following year. After that, annual RMDs are generally due by December 31.
By Jeff Herman
Pro tip: Delaying the first withdrawal can mean taking two taxable distributions in one year.
Why am I thinking about RMDs now?
October can be a useful time to review your plan before year-end, not because RMDs are due in October, but because your withdrawal choices may affect your taxes and future retirement income. This is the time to establish your RMD strategy before it’s too late.
An RMD is generally calculated using your retirement account balance at the end of the previous year and an IRS life-expectancy factor. The required amount may change from year to year. What you should be speaking to your advisor about now is which accounts are subject to RMDs, how much you need to withdraw, and how the distribution fits into your broader income plan.
Planning ahead also gives you time to consider how withdrawals may interact with other income, including Social Security. A distribution from a traditional retirement account can affect your taxable income, and other income can affect how much of your Social Security benefit is taxable.
An RBC survey of 2,000 people retired or within five years of retirement found that only 44% understood RMDs and 49% understood the tax implications of withdrawals.
For someone with several million dollars in tax-deferred retirement accounts, an RMD can represent a substantial taxable withdrawal, even if they don’t need all of it for spending. As a rough illustration, a 73-year-old with $3 million to $5 million in eligible accounts could have a first-year RMD of about $113,000 to $189,000 under the standard IRS table. The actual amount depends on the account balance at the end of the prior year and individual circumstances. That’s one reason to understand your future withdrawals before they begin.
These are the primary questions I want you to begin thinking about:
- What is my estimated RMD?
- Which account should the distribution come from?
- How will the withdrawal affect my taxes?
- Do I need the money for spending, or will I reinvest it?
- How does this fit with my Social Security timing?
RMD planning isn’t just about meeting a deadline. It’s about understanding how retirement-account withdrawals fit into your income strategy.