Understanding RMD Age: Key Facts for Retirees

Reviewed by: Brian Stormont, CFP®
October 15, 2024

Required Minimum Distributions (RMDs) are mandatory withdrawals that retirees must begin taking from certain retirement accounts, like traditional IRAs and 401(k)s, once they reach a specific age. Understanding when RMDs start and how they work is vital for retirees, as missing these withdrawals can result in significant tax penalties. For those planning their retirement, knowing the details of RMDs ensures smoother financial transitions and helps avoid costly mistakes. In this article, we’ll explain when RMDs begin, how they’re calculated, and offer tips for integrating RMDs into your broader retirement strategy.

What Are Required Minimum Distributions (RMDs)?

RMDs are mandatory withdrawals from their tax-deferred retirement accounts, such as 401(k)s, traditional IRAs, and 403(b) plans, that retirees must take once they reach a certain age¹. The purpose of RMDs is to ensure that retirees begin withdrawing funds that have grown tax-deferred over the years, allowing the government to collect taxes on those distributions.

RMDs exist to prevent individuals from holding onto their retirement savings indefinitely without paying taxes. By requiring annual withdrawals, the government ensures that retirees eventually use their retirement savings, providing a stream of income and generating tax revenue. Retirement accounts that are subject to RMDs include traditional IRAs, 401(k)s, 403(b)s, SEP IRAs, and SIMPLE IRAs. RMDs apply to certain retirement accounts, such as traditional IRAs and 401(k)s, which are categorized as qualified retirement plans. Understanding the structure of these plans is essential for retirees who need to navigate RMD requirements effectively. Roth IRAs are not subject to required withdrawals during the owner’s lifetime. However, designated Roth accounts within 401(k) or 403(b) plans must follow RMD rules for the years 2022 and 2023. Starting in 2024, these accounts will no longer require RMDs. That said, for 2023, RMD payments must still be taken, including for accounts with a required beginning date of April 1, 2024².

When Do You Need to Start Taking RMDs?

Currently, retirees must begin taking Required Minimum Distributions (RMDs) by April 1 of the year following the year they turn 73, thanks to recent legislative updates. This age requirement was raised as part of the SECURE Act 2.0, which adjusted the previous starting age of 72 to help retirees keep their savings invested longer before withdrawals are required³. It’s important to stay aware of these legislative changes, as future adjustments may continue to impact the RMD start age.

The first RMD must be taken by April 1 of the year after turning 73, but all subsequent RMDs must be withdrawn by December 31 of each year. For example, if you turn 73 in 2024, you must take your first RMD by April 1, 2025, but you’ll also need to take another RMD by the end of 2025. This means delaying your first RMD could result in two withdrawals in the same year, potentially increasing your taxable income.

Failing to take RMDs on time can lead to steep penalties. As of 2023, the IRS imposes a 25% tax penalty on any amount not withdrawn by the deadline². However, under certain conditions, the penalty may be reduced to 10% if the error is corrected in a timely manner². This makes it critical for retirees to stay on top of their RMD schedule to avoid unnecessary costs.

How to Calculate Your RMD

Calculating your RMD involves a simple process, but it’s important to recalculate each year, as the amount changes based on your account balance and age. Below is a step-by-step guide to help you determine your annual RMD:

Find Your Account Balance
First, determine the total balance of your tax-deferred retirement savings account as of December 31 of the previous year.

Locate Your Life Expectancy Factor
Next, refer to the IRS Uniform Lifetime Table to find your life expectancy factor, which corresponds to your current age. The life expectancy factor represents how long you’re expected to live and is key to calculating your RMD.

Apply the RMD Formula
Use the formula:
Account Balance ÷ Life Expectancy Factor
For example, if your account balance is $500,000 and your life expectancy factor is 25.6, your RMD would be:
$500,000 ÷ 25.6 = $19,531.25
This is the amount you would need to withdraw for that year.

Repeat Annually
This calculation must be done every year, as both your account balance and life expectancy factor will change. Keep in mind that as you age, your life expectancy factor decreases, meaning your RMD will typically increase over time.

You can use the official IRS RMD worksheet for assistance: IRS RMD Worksheet.

Special Considerations for Multiple Accounts

If you have multiple retirement accounts, such as multiple traditional IRAs or 401(k)s, the process can become more complex. For traditional IRAs, you can calculate the RMD for each account and then withdraw the total RMD from one or more accounts. However, for 401(k)s, the RMD must be taken separately from each plan. This makes careful tracking and retirement planning important.

If you’re self-employed, it’s important to understand the distinctions between retirement accounts like a self-employed 401(k) and a SEP IRA, both of which come with specific rules for RMDs. Learn more about these self-employed retirement options to determine the best fit for your financial goals.

How to Plan for RMDs as Part of Your Retirement Strategy

Incorporating RMDs into your retirement income plan is essential for managing your long-term finances and minimizing potential tax burdens. Here are a few tips to help make RMDs work for you:

Withdraw More Than the Minimum
While RMDs dictate the minimum amount you must withdraw, you can always take out more if it aligns with your financial goals. Withdrawing more may be beneficial if you need additional income or if you want to reduce the size of your account to limit future RMDs, which may increase as you age.

Align RMDs with Your Tax Strategy
RMDs are fully taxable as ordinary income, so it’s important to consider the tax implications of your withdrawals. Working with a financial advisor can help you structure your RMDs to minimize tax liability. For instance, if you’re nearing a higher tax bracket, your advisor might suggest strategies to manage withdrawals over multiple years to keep taxes lower. Working retirees may find it particularly useful to plan for RMDs, as additional income could push them into higher tax brackets.

Start Early to Spread Out Withdrawals
Though RMDs don’t officially start until age 73, you can begin withdrawing from your accounts earlier. By taking distributions early, you may reduce the size of your account, which can help lower your future RMDs. This strategy can help you avoid large taxable distributions down the road that could push you into a higher tax bracket.

Reinvest RMDs to Support Long-Term Goals
If you don’t need your RMD for immediate income, consider reinvesting the money into a taxable brokerage account. This allows your savings to continue growing, supporting your long-term financial objectives, whether it’s funding future travel, helping loved ones, or growing your investment portfolio.

Incorporating RMDs into your overall retirement strategy requires a thoughtful approach. Working with a financial advisor can ensure that your withdrawals align with both your income needs and tax strategy, allowing you to make the most of your retirement savings.

Common Mistakes Retirees Make with RMDs

Despite the importance of RMDs, many retirees make mistakes that can lead to costly penalties or missed opportunities. Below are some of the most common mistakes retirees make and how to avoid them:

Missing the RMD Deadline
One of the most frequent mistakes is failing to take the RMD by the required deadline. The IRS mandates that you take your first RMD by April 1 of the year after you turn 73, and subsequent RMDs must be taken by December 31 each year. Missing the deadline can result in a steep 25% tax penalty on the amount not withdrawn. While the penalty can sometimes be reduced to 10% if corrected quickly, this is a mistake best avoided by staying on top of the schedule.

Miscalculating the RMD Amount
RMDs are calculated based on your account balance and a life expectancy factor, and errors in this calculation can lead to either withdrawing too little—resulting in penalties—or too much, potentially increasing your taxable income unnecessarily. It’s important to use the correct formula and up-to-date life expectancy tables, or work with a financial advisor to ensure accurate calculations each year.

Forgetting About All Accounts Requiring RMDs
Another common oversight is forgetting to account for all tax-deferred retirement accounts that require RMDs. This often happens when retirees have multiple accounts, such as old 401(k)s or IRAs, from previous employers. Failing to take RMDs from each required account can lead to penalties.

RMDs and Taxes: What You Need to Know

RMDs are taxed as ordinary income, meaning the amount you withdraw is added to your taxable income for the year. This can affect your overall tax liability, especially if your RMD is large enough to push you into a higher tax bracket. Understanding how RMDs are taxed and exploring strategies to minimize the impact is crucial for managing your retirement finances effectively.

Tax Treatment of RMDs
Since RMDs come from tax-deferred accounts, like traditional IRAs and 401(k)s, the amount withdrawn is subject to federal income tax at your current income tax rate. Depending on where you live, state taxes may also apply. The total amount of your RMD is included in your annual taxable income, which can affect your tax bracket, potentially increasing the taxes you owe.

Strategies to Minimize the Tax Burden
One of the most effective ways to reduce the tax impact of RMDs is through a Qualified Charitable Distribution (QCD). A QCD allows you to donate up to $105,000 per year directly from your IRA to a qualified charity, and the amount you give counts toward your RMD but is not included in your taxable income⁵. This strategy can be particularly useful for retirees who are charitably inclined and want to reduce their tax liability while supporting causes they care about.

Managing Tax Brackets in Retirement
Careful planning can help you manage your tax brackets in retirement by spreading out taxable income over time. One option is to start withdrawing from your accounts before you reach the RMD age of 73. By taking withdrawals earlier, you can reduce the size of your retirement accounts and therefore lower your future RMDs, preventing large taxable withdrawals later that could push you into a higher tax bracket. Additionally, working with a financial advisor to structure withdrawals and coordinate with other sources of income, such as Social Security, can help you manage your tax burden more efficiently.

Recent Changes to RMD Rules and What They Mean for You

Recent legislative changes, particularly the SECURE Act 2.0, have significantly impacted the rules governing RMDs. These updates aim to give retirees more flexibility in managing their retirement accounts while adjusting to the realities of longer life expectancies. Here’s a look at the key changes and what they mean for your retirement planning:

RMD Age Increased to 73
One of the most notable changes is the increase in the starting age for RMDs. Under the SECURE Act 2.0, the RMD age has been raised from 72 to 73 for individuals born between 1951 and 1959⁶. Additionally, the RMD age will rise again to 75 for those born in 1960 or later. This change allows retirees more time to keep their savings invested in tax-deferred accounts before mandatory withdrawals begin, offering the potential for continued growth.

Impact on Retirement Planning
The delay in the RMD start age provides retirees with more flexibility in planning their withdrawals. This extra time can be valuable for those who want to maximize their account growth or those who are still earning income and want to delay adding taxable RMDs to their annual income. With more time to plan, retirees can explore strategies such as Roth conversions, which allow them to transfer funds from a traditional IRA to a Roth IRA, paying taxes upfront but avoiding RMDs and taxes on future withdrawals.

Provisions for Delaying RMDs
While RMDs are mandatory for most, there are some provisions that may allow retirees to delay their first RMD. For example, if you are still working and have a 401(k) through your employer, you may be able to delay RMDs from that specific account until you retire, as long as you do not own more than 5% of the company. Additionally, the Qualified Charitable Distribution (QCD) strategy, as mentioned earlier, allows you to reduce taxable income while fulfilling your RMD requirements through charitable donations.

These legislative changes provide more opportunities for retirees to customize their retirement strategies and delay or manage RMDs in ways that better fit their personal financial goals. However, it’s important to stay informed about future legislative updates, as further changes could continue to shape the landscape of retirement planning.

How Insight Can Help with Your RMD Planning

At Insight Wealth Strategies, we understand that managing RMDs can be complex, but we’re here to simplify the process and help you make the most of your retirement savings. Our comprehensive services are designed to ensure that your RMDs fit seamlessly into your broader financial plan, allowing you to focus on enjoying retirement without worrying about penalties or tax complications. Here’s how we can assist:

Personalized RMD Strategies
Every retiree’s financial situation is unique, and that’s why we offer personalized RMD strategies tailored to your needs. Whether you’re considering starting withdrawals early, coordinating RMDs with other sources of income, or looking to minimize the tax impact of your distributions, our advisors work closely with you to create a customized plan that aligns with your long-term financial goals.

Tax Planning and Optimization
RMDs are taxable, and the amount you withdraw can significantly impact your overall tax liability. Our team of advisors provides tax planning strategies to help minimize the tax burden associated with your RMDs. Our goal is to ensure that you keep more of your hard-earned savings.

Ongoing Monitoring and Adjustments
As RMD amounts change each year, we provide ongoing monitoring to ensure that your withdrawal strategy remains optimized. We keep you informed of any legislative changes and adjust your plan as needed to take advantage of any new opportunities, such as updated RMD age requirements or changes in tax laws.

To learn more about our Retirement Planning services, visit our website or schedule a consultation with one of our advisors today.

Conclusion

Understanding RMDs is essential for retirees looking to manage their retirement savings effectively. From knowing when RMDs begin, what your Required Minimum Distribution age is, to calculating them accurately and incorporating them into a broader retirement planning strategy, careful planning is important. Key takeaways include the importance of meeting deadlines to avoid penalties, considering strategies like Qualified Charitable Distributions (QCDs) to reduce tax burdens, and seeking professional guidance to ensure your withdrawals align with your long-term goals.

At Insight Wealth Strategies, we specialize in helping retirees navigate the complexities of RMDs. Our personalized strategies are part of our comprehensive approach to financial planning services. With our knowledge in investment management services, tax planning services, and ongoing support are designed to help you optimize your withdrawals and preserve your wealth for the future. Contact us today to schedule a consultation and see how we can assist you with your RMD planning and overall financial well-being.

Reviewed by,

Brian Stormont, CFP®

Brian Stormont is a comprehensive, fee-only financial advisor with Insight Wealth Strategies who began his career in the financial industry in 2000. His expertise encompasses retirement planning, investment planning, estate planning, and high-level strategies to help business owners and individuals minimize their income taxes.

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