Staying on top of your financial plan doesn’t end with your retirement date. There are specific milestones to be aware of, such as reaching the age for required minimum distributions (RMDs) and how they can affect your cash flow, taxes, and retirement income strategy. Understanding what RMDs are, when they apply, and how to stay compliant while reducing tax liability is crucial to comprehensive retirement planning. Learn more about managing RMDs and making the most of your hard-earned savings.
What Is an RMD?
Certain ages based on birth year trigger an annual required minimum distribution from retirement accounts, with some exceptions. RMDs ensure the IRS can tax retirement income in tax-deferred accounts.
When Do RMDs Begin?
RMDs kick in based on when you were born (based on current 2025 laws and assuming you are no longer actively employed):
- If you were born before July 1, 1949, you should already be taking your RMD every year.
- If you were born on or after July 1, 1949, or in 1950, you should have started taking RMDs at 72.
- If you were born between 1951 and 1959, RMDs begin at 73.
- For all those born in 1960 or after, you will take RMDs at 75.
How Do You Calculate RMDs?
You can calculate your RMD amount by dividing your year-end account balances in eligible accounts by your life expectancy factor (based on age) set by the IRS. There are special rules for inherited IRAs and for couples where one spouse is more than 10 years younger than the other.
Other Considerations to Know About RMDs
Here are more details about RMDs:
- RMDs are considered taxable income.
- While you must calculate your RMDs for each eligible account each year, you can aggregate RMDs from multiple traditional IRAs, excluding inherited IRAs. Employer retirement plans generally must also be taken separately, with some exceptions.
- While there is no set time to take your RMDs once triggered, you must make them annually by Dec. 31. We recommend reviewing strategies to save on taxes at the end of each year when you have a better understanding of what your estimated taxable income will be and your anticipated tax bracket.
- It’s possible to delay your first RMD to the following year as long as it is taken by April 1. Partnering with an advisor can help determine the best time for tax purposes and your overall financial strategy.
- You may take more than your calculated amount for various reasons, such as aligning your withdrawal with a lower expected tax bracket (e.g., withdrawing more when your income is lower). You may also draw from your IRA prior to RMD age to help lower future RMD amounts.
- There may be strategies you can use to reduce your RMD and potentially prevent you from being in a higher tax bracket with a bigger tax liability in the future.
How to Plan Your Retirement Income Based on RMDs
It’s important to consider RMDs as part of your retirement planning long before they’re required, as they are taxed as regular income and may also affect your cash flow, tax situation, and access to low-cost healthcare. Here is how you can factor them into your retirement plan:
- Develop a Balanced Withdrawal Strategy: Consider your income streams and how they align with your RMDs. You can work with an advisor to determine the timing of your distributions for RMDs, which accounts you should withdraw from first, and how they’ll affect your taxes and financial situation. Remember that some Medicare premiums are income-based, and a larger RMD could make you ineligible for low-cost premiums.
- Plan for Taxes: Work with a professional to identify strategies to minimize your tax burden, such as:
- Qualified Charitable Distribution (QCD): If you don’t need the RMD income or risk greater tax liability in a higher tax bracket, you can consider a QCD, which allows you to donate up to $108,000 (2025 amount) to an eligible charity. The donation is made directly to the charity from the IRA. There are a few reasons you may consider a QCD, such as:
- If you don’t want to take an RMD that increases your taxable income and may affect your tax bracket
- To lower your IRA assets, which also decreases your RMD amount in the future
- To support a charity or charities with a significant gift if you don’t need additional income from the RMD in that year
- Roth Conversion: Consider converting all or a portion of your eligible balances to a Roth account. Roth account withdrawals are tax-free, and there are no RMDs. RMDs do, however, apply to heirs who inherit these accounts after an owner’s death. Please note legislation may alter this option in the future.
- “Smooth Out” Taxes: You may also consider withdrawing money from your IRAs during low-income years and before required minimum distributions start to effectively level your liability over the years and lower your taxes in the long run.
- Qualified Charitable Distribution (QCD): If you don’t need the RMD income or risk greater tax liability in a higher tax bracket, you can consider a QCD, which allows you to donate up to $108,000 (2025 amount) to an eligible charity. The donation is made directly to the charity from the IRA. There are a few reasons you may consider a QCD, such as:
- Avoid Penalties: We often get asked if there are ways to avoid taking RMDs. Under the current law, there are no ways to get around or skip taking your RMD from pre-tax retirement accounts. If you fail to pay your RMD by the deadline, you could incur a 25% penalty. Working with an advisor or establishing automated withdrawals may help avoid hefty fines.
- If you miss your RMD or fail to distribute the full amount, we recommend working with a tax professional to request a waiver of the excise tax. Notifying the IRS within a specific timeframe may result in certain leniencies, so quickly correcting errors is essential.
Required Minimum Distributions: How CCMI Helps
As you can see, understanding your RMDs and their implications is more complex than a simple set-it-and-forget-it calculation. We regularly inform clients of new RMD laws and help them calculate and factor RMDs into their comprehensive retirement plan and overall financial strategy.
We will also consider factors like the economy, markets, goals, taxes, and income requirements to ensure your timing aligns with your retirement needs while remaining compliant. We can also walk you through scenarios, such as:
- Should you delay your first RMD or take RMDs early?
- Should you take a lump sum or regular withdrawals throughout the year?
- Which tax strategies may help reduce your taxable income and liability?
- What do business owners need to know about RMDs?
- How will RMDs affect inheritances, heirs, and estate planning?
- Should you utilize a Qualified Charitable Distribution (QCD) from your RMD?
It’s never too early to start planning. RMD rules can be complicated depending on your situation, so it’s critical to work with a professional to help implement the best strategy to help you save money over your lifetime. If you are approaching RMD age or just want to plan ahead, please contact our team for help navigating RMDs.
CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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