Required Minimum Distributions: Everything You Need to Know

Reviewed by: Chad Seegers, CRPC®
August 17, 2023

Required Minimum Distributions (RMDs) are a crucial aspect of retirement planning. Essentially, RMDs are the minimum amount of money that retirement account owners must withdraw annually once they reach a certain age. These distributions are mandatory to ensure that individuals cannot indefinitely defer paying taxes on their retirement savings. The rules surrounding RMDs can be intricate, and failure to adhere to them may result in significant penalties. Whether you’re nearing retirement age or just starting your financial journey, understanding RMDs is fundamental to making informed decisions about your retirement assets.

What is my RMD Age?(1)

Born before July 1, 1949: RMDs start at age 70½.
Born on or after July 1, 1949, and before July 1, 1950: RMDs start at age 71.
Born on or after July 1, 1950, and before July 1, 1951: RMDs start at age 72.
Born on or after July 1, 1951, and before July 1, 1958: RMDs start at age 73.
Born on or after July 1, 1959, and before July 1, 1960: Likely 73, but the SECURE Act 2.0 assigned both age 73 and age 75 to individuals born in 1959. This will need to be clarified in the future.
Born on or after July 1, 1960: RMDs start at age 75

The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0, a bipartisan piece of legislation, made significant updates to retirement planning rules. One notable change included raising the RMD age from 72 to 73 for individuals who turn 72 after the year 2022. This adjustment recognizes the growing trend of individuals working longer and delaying retirement, providing them with additional flexibility in managing their retirement savings.⁽²⁾

For individuals who turned 72 on or before December 31, 2021, the previous RMD rules apply, and they must start taking their RMDs at age 72. However, for those who turn 72 after 2022, their RMDs will commence at age 73, giving them an extra year to allow their retirement savings to potentially grow and reducing the immediate tax burden on their distributions.

It’s important to stay informed about legislative changes like the SECURE Act 2.0, as they can have a significant impact on your retirement planning strategy. Consulting with a qualified financial advisor or tax advisor can help you navigate these changes and make well-informed decisions that align with your retirement goals and financial situation.

How are RMDs calculated by the IRS?

The Internal Revenue Service (IRS) has established specific guidelines for calculating Required Minimum Distributions (RMDs) to ensure that retirees draw down their tax-advantaged retirement accounts over their lifetimes. The most common method used for this calculation is based on the IRS Uniform Lifetime Table. This table provides life expectancy factors that are determined by the age of the account owner and their beneficiary, if applicable. These factors determine the distribution period over which the retirement savings must be depleted. The table considers the potential lifespan of the account owner and their beneficiary to ensure a gradual distribution of the funds over the expected remaining years.

To calculate your RMD, you’ll need the following information: the fair market value (FMV) of your retirement account(s) as of December 31 of the previous year and your age. The FMV is the total value of your retirement accounts, including IRAs, 401(k)s, and other qualified plans. Alternatively, if your spouse is your sole beneficiary and is more than ten years younger than you, you may use the IRS Joint Life and Last Survivor Expectancy Table.

Once you have these details, you can use the life expectancy factor from the IRS Uniform Lifetime Table that corresponds to your age. You then divide the FMV or entire interest value (EIV) of your retirement account by the life expectancy factor to determine the amount you must withdraw for the year. As you age, the life expectancy factor decreases, which increases the percentage of your retirement account that you must withdraw annually.

Understanding how to calculate RMDs is crucial as it allows you to plan and budget effectively during retirement. By mastering the RMD calculations, you can help optimize your withdrawals and make the most of your hard-earned retirement savings.

It is important to remember that RMDs are taxable income, and failure to take the required distributions or not withdrawing the correct amount can result in substantial IRS penalties. However, you can withdraw more than the minimum RMD amount if desired, which may be beneficial if you anticipate higher expenses or wish to preserve wealth for future generations.

How can a financial advisor help me with my RMDs?

Navigating the intricacies of Required Minimum Distributions (RMDs), especially in relation to Social Security and qualified plans, can be complex, but seeking the expertise of a financial advisor can provide invaluable guidance in determining RMD amounts and identifying which retirement accounts are subject to RMDs. Working with an advisor can help in the following ways:

RMD Calculations: A financial advisor can calculate RMDs accurately, factoring in your age, the type of retirement accounts you hold, and the IRS Uniform Lifetime Table or other relevant IRS tables. They will review your financial situation, including all retirement account balances, to ensure that you meet the RMD requirements while making informed decisions about your withdrawals. By staying on top of these calculations, you can avoid penalties and ensure that you receive the necessary distributions for your retirement income needs.
Identifying Subjected Retirement Accounts: A financial advisor can assess your retirement portfolio to determine which accounts are subject to RMDs. Traditional IRAs, employer-sponsored 401(k)s, 403(b)s, and other similar tax-deferred retirement accounts are generally subject to RMD rules. On the other hand, a Roth IRA does not require RMDs during the original account owner’s lifetime, but beneficiaries may face RMD obligations. Inherited IRAs also have specific RMD rules depending on the relationship of the beneficiary to the original account owner. A financial advisor can help you understand the unique RMD requirements for each type of retirement account you hold.
Withdrawal Strategies: By collaborating with a financial advisor, you can develop smart withdrawal strategies that align with your financial goals and circumstances. They can help you optimize your RMDs, considering factors like taxes, potential penalties, and the impact of your distributions on your overall financial plan. A financial advisor may recommend spreading your RMDs throughout the year to manage tax implications more effectively or help you decide whether you should withdraw more than the minimum required amount, depending on your specific needs.
Investing for Early Retirement: One of the key aspects of early retirement planning is effective investment strategies. A financial advisor can work with you to create an investment plan that aligns with your goal of retiring early. They can help you allocate your assets, manage risk, and explore investment options that have the potential to accelerate your path to retirement. By integrating your early retirement aspirations with your RMD planning, you can work towards a financially secure future.
Long-Term Retirement Planning: Beyond just addressing RMDs, a financial advisor plays a critical role in long-term retirement planning. They can assess your overall financial situation, provide insights on investment strategies, analyze your retirement income needs, and help you develop a comprehensive retirement plan that ensures a secure and comfortable future. This approach takes into account RMDs as one component of your broader financial strategy.
Staying Updated with Regulations: Tax laws and retirement account rules can change over time, potentially impacting RMD requirements. A financial advisor stays informed about any legislative updates and ensures that your retirement plan remains compliant with current regulations. They can adjust your RMD calculations accordingly, guiding you through any new rules that may affect your retirement accounts.

RMDs are a critical aspect of retirement planning, and a financial advisor can provide valuable assistance in determining RMD amounts and identifying which retirement accounts are subject to these distributions. Their expertise helps you navigate complex tax and retirement regulations, optimize your withdrawals, and develop a comprehensive retirement strategy that aligns with your unique financial objectives.

Can I Reinvest My Required Minimum Distribution?

You cannot directly reinvest your Required Minimum Distribution back into a tax-advantaged retirement account. RMDs represent the minimum amount that you are required to withdraw from your retirement accounts each year, and the IRS mandates that these distributions are not eligible for reinvestment into tax-advantaged accounts like Traditional IRAs or employer-sponsored retirement plans.

However, there are several alternative options for utilizing your RMD funds:

Personal Spending: You can use the money from your RMD for personal expenses or to cover living costs during retirement.
Taxable Investment Accounts: After receiving your RMD, you can choose to invest the funds in taxable investment accounts. While these accounts don’t offer the same tax advantages as retirement accounts, they can provide additional opportunities for growth and flexibility in managing your investments.
Charitable Donations: If you’re charitably inclined, you may use your RMD to make qualified charitable donations directly from your retirement account through a Qualified Charitable Distribution (QCD). This strategy allows you to fulfill your RMD obligation while potentially reducing your taxable income, as QCDs are not subject to income tax.
Estate Planning: You may decide to incorporate your RMD into your estate planning by gifting the funds to beneficiaries or using them to fund a trust or other estate planning strategies.
Reinvest in Non-Retirement Assets: You can reinvest the RMD funds into non-retirement assets, such as real estate or other types of investments.

While you cannot reinvest your RMD directly into tax-advantaged retirement accounts, exploring these alternative options allows you to make the most of your RMD funds according to your financial goals and preferences. Before making any decisions, it is wise to consult with a financial advisor to understand the tax implications and select the best strategy based on your overall financial situation and retirement objectives.

Understanding the complexities of retirement planning, including Required Minimum Distributions, can be overwhelming. But you don’t have to face it alone. Insight is your trusted partner, providing guidance and personalized solutions to ensure your retirement journey is smooth and secure. Our team of experienced financial advisors will assist you in calculating your RMDs accurately, identifying the retirement accounts subject to RMDs, and developing a retirement plan that aligns with your financial goals. With Insight by your side, you can confidently make informed decisions and optimize your retirement strategy. Let us help you make the most of your retirement and create a financially confident future. Whether you’re looking for Houston retirement strategies or a San Ramon retirement planner, contact us today to get started on your retirement planning journey.

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Reviewed by,

Chad Seegers, CRPC®

Chad began his career with Sagemark Consulting in 2005 and then became a Select member of Sagemark’s Private Wealth Services which operated as a national resource for financial planners focusing on Advanced Strategies in the High Net Worth marketplace. Chad then began his partnership with Insight Wealth Strategies in 2013 focused on retirement planning primarily with Oil and Gas employees and executives. His primary areas of expertise are retirement, estate, and investment strategies as he serves as Investment Strategist for the financial planning team.

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