Understanding Required Minimum Distributions (RMDs)
Written By: Ryan Rink, CFP®, EA, ChFC®, CLTC®
Required Minimum Distributions (RMDs) are the minimum amounts that the IRS requires you to withdraw each year from tax-deferred retirement accounts, such as traditional IRAs and 401(k)s. The IRS mandates RMDs to begin the process of taxing funds that have grown tax-deferred for years. Roth accounts, such as Roth IRAs or Roth 401(k)s, are not subject to RMDs.
If you have an inherited IRA/401(k) account, these are often subject to RMDs as well, but the rules are much more complex. Reach out to your Shakespeare advisor to address the specific RMD rules for that account.
When Do I Have to Start Taking RMDs?
This can be a confusing question – especially since the IRS has changed the starting age a couple of times over the past few years. Currently, you must start taking RMDs at:
– Age 73 for individuals born between 1951 and 1959.
– Age 75 for individuals born in 1960 or later.
You must take your first RMD by April 1st of the year following the year you reach the required age (also known as your required begin date). Each year thereafter, RMDs must be taken by December 31st. Deferring your first RMD to April can result in two RMDs in one year, which may push you into a higher tax bracket, so we generally don’t recommend waiting.
Example: Client turns age 73 in 2025 and their RMD amount is $25,000. The $25,000 must be withdrawn by 4/1/2026. The client will also have another RMD in 2026 – let’s say $30,000 for this example. The 2026 RMD ($30,000) must be taken by 12/31/2026. In most instances, we would recommend that the client take their 2025 RMD before 12/31/2025 so they don’t have multiple RMD withdrawals in 2026.
How Are RMDs Calculated?
There are two components that go into calculating RMDs:
1) Your account balance as of December 31st of the previous year.
2) Your life expectancy factor (from IRS-provided tables).
Here is an example calculation for a 2025 RMD:
1) As of December 31st, 2024, the client’s IRA account balance was $1,000,000.
2) The IRS life expectancy factor for 2025 is 20.2.
3) The 2025 RMD would be $49,504.95 ($1,000,000 / 20.2).
Fortunately, most custodians (such as Schwab, Fidelity, Vanguard, etc.) automatically calculate RMDs on your behalf, so you should be able to see the required amount on your account statements. Shakespeare also has access to your RMD amounts, so please reach out at any point if you would like to know your RMD.
What Happens If I Don’t Take My RMD?
Missing an RMD or withdrawing less than the required amount can lead to significant penalties:
– A 25% penalty on the amount not withdrawn.
– It can be reduced to 10% if corrected in a timely manner.
At Shakespeare, we take a proactive approach to help you monitor your RMDs. We discuss all required distributions in your review meetings and track withdrawal amounts throughout the year to ensure you satisfy all IRS requirements.
How Can I Best Optimize My RMDs?
Working with Shakespeare means you’re not navigating these decisions alone. Here are a couple of ways to optimize RMDs:
1) Qualified Charitable Distributions (QCDs): If you’re 70½ or older, you can direct up to $108,000 annually from your IRA to a qualified charity. These donations count towards your RMD amount and are not reported as taxable income on your tax return.
2) Roth Conversions: Prior to reaching RMD age, converting traditional IRA assets to a Roth IRA can reduce future RMDs and create long-term, tax-free savings.
3) Account Consolidation: When you have multiple retirement accounts (IRAs and 401(k)s), it’s important to understand that the RMD rules aren’t the same for each. For IRAs, you can aggregate RMDs and take the total from one account. For 401(k)s, each account’s RMD must be taken separately. We often recommend consolidating all retirement accounts into one IRA to simplify the process.
Let’s Plan Ahead Together
If you’re approaching RMD age or have already begun taking distributions, now is a great time to review your plan. With the expertise and personalized guidance of your Shakespeare advisor, you can navigate these rules confidently, avoid unnecessary taxes and penalties and ensure your retirement plan continues to serve your needs.
BONUS TIP – Review the checklist below to see if you’re eligible to delay taking RMDs:
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