Optimizing Required Minimum Distributions
Following a few rules may help maximize the impact on your bottom line
Required minimum distributions (RMDs) take on urgency as you approach (and reach) age 73, with specific rules and tax implications. Seventy-three is an important age milestone (previously, the threshold was 72) for those in or near retirement, as it marks the time when required minimum distributions (RMDs) must be withdrawn annually from Individual Retirement Accounts (IRAs) and employer-sponsored retirement plans. This milestone carries with it tax consequences that are not fixed. Rather, there are a few rules to consider that can help you optimize the impact on your bottom-line.
IRAs
Individuals who turned 72 in 2023 (or later), must begin taking withdrawals from traditional IRAs by April 1 following the year they turn 73. The amount is based on your age with one exception: If you’re married and your spouse is more than 10 years younger than you, the RMD amount is based on your joint life expectancy. If your distribution is less than the required minimum, you will be penalized 25 percent of the difference. Note: Roth IRAs do not require an RMD.
Employer-sponsored retirement plans
For employer retirement plans — 401(k)s, 403(b)s and others — the same timeline applies as IRAs: You must begin withdrawing from the plan by April 1 following the year you turn 73. However, if you are still working past 73 and own 5 percent or less of a company, you may be able to delay RMDs until you retire.
Additionally, depending on your circumstances, you may receive a lump-sum distribution from 401(k), profit-sharing and stock-purchase plans if completed in a one-year period. For tax purposes, RMDs from qualified retirement accounts are taxed as ordinary income.
Calculating your distribution
The institution where your retirement is kept typically determines the RMD amount using the formula:
Total balance as of December 31 divided by your life expectancy equals distribution amount
However, there is some leeway that may offer beneficial tax consequences:
- You can either take your initial RMD in the year you turn 73 or up until April 1 of the following year.
- If you delay your RMD until the following year, you must take two RMDs that year — which may increase your taxes.
- You can take your RMD as a series of withdrawals rather than one lump payment, which may help you with monthly cash flow.
Update your beneficiary/beneficiaries as to your distributions. For IRAs, account holders can designate anyone as a beneficiary; For employer-sponsored plans, they must designate their spouse as a beneficiary unless the spouse specifically waives the right.
Seek help
Tax consequences for RMDs can be significant, so seeking the support of a financial advisor can be prudent to help align the results with your goals.
