Here are some basics to know about required minimum distributions and how RMDs can impact your taxes.
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It is important to have a good grasp of required minimum distribution (RMD) rules and the tax implications that come with them. That can help you manage your tax obligations effectively in retirement.
To get started, here is an overview of some core RMD concepts.
Of course, if you need more detailed information, it's best to seek guidance from a qualified financial adviser or tax professional.
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A required minimum distribution is money that must be taken out of a retirement savings plan. More specifically, RMDs are the minimum amounts that must come out of given retirement plan accounts each year once the account holder reaches a certain age.
RMDs, calculated based on a formula described below, are generally designed to ensure that retirees gradually draw down their retirement savings and pay taxes on the funds as they withdraw them.
Key points:
According to the IRS, April 1 is a key RMD deadline for some older adults receiving their first required distribution from an IRA, 401(k), or similar retirement plan.
That’s because the first RMD is due by April 1 of the year following the calendar year in which you reach age 73, if you reach 72 after Dec. 31, 2022. Subsequent RMDs generally have to be made by Dec. 31.
If you miss an RMD deadline or fail to pay the minimum amount, you may be subject to an IRS penalty (more on that below).
Note: Taking two RMDs in one year can have important tax implications.
Those distributions could push you into a higher tax bracket, meaning a larger portion of your Social Security income could be subject to taxes. You could also end up paying more for Medicare Part B or Part D premiums.
RMDs are calculated based on life expectancy tables provided by the IRS and the retirement account's value. To calculate your RMD, you divide the value of each retirement account at the end of the previous year by the IRS distribution period based on your age when you take the RMD.
Chris Gullotti, financial adviser and partner at Canby Financial Advisors, provides an example of how this works. “Say your IRA was worth $500,000 at the end of 2023, and you were taking your first RMD at age 73 [that] year. Your distribution amount would be $18,868 ($500,000 divided by 26.5).”
For more information, see Gullotti’s article for Kiplinger: What You Need to Know About Calculating RMDs for 2024.
RMDs are taxed as ordinary income and can push retirees into higher federal income tax brackets, which can increase the overall tax burden. As a result, you should plan distributions strategically to help minimize tax liabilities.
Note: To have an effective tax plan for retirement, it's also important to know how the IRS taxes other types of retirement income.
For example, life insurance proceeds, long-term care insurance payments, disability benefits, muni bond interest, and alimony and child support are generally not taxable. Additionally, earned income in states with no income tax isn't subject to tax at the state level.
Still, your tax planning should consider the tax treatment of income from annuities, pensions, and Social Security benefits. You will also want to assess tax liability from various investments, earnings, and proceeds.
Inherited IRAs may have different RMD rules and timelines depending on the beneficiary's relationship to the original account holder. The IRS also recently finalized rules for inherited IRAs, clarifying that many beneficiaries, subject to the 10-year rule, will have to take annual distributions.
IRS RMD delays: The IRS delayed the final rules governing inherited IRA RMDs — to 2025. As a result, some beneficiaries of inherited IRAs had more time to adapt to distribution requirements. The IRS will waive penalties for RMDs missed in 2024 from IRAs inherited in 2023, where the deceased owner was already subject to RMDs.
With previously granted relief, the IRS waived penalties for missed RMDs from specific IRAs inherited in 2020, 2021, 2022, and 2023. For more information on the IRS RMD delays, see Another IRS RMD Delay.
Failing to take RMDs on time or in the correct amount can result in substantial IRS tax penalties. RMD penalties are calculated based on the shortfall between the actual distribution taken and the amount that should have been withdrawn.
In the past, those penalties were typically 50% of the required amount not withdrawn. However, under the SECURE 2.0 Act, penalties for not taking RMDs are lower.
For more information on these and other RMD rule changes, see Kiplinger’s report on new RMD rules.
Financial institutions typically issue Form 1099-R to report distributions from retirement accounts, including RMDs. As mentioned, seeking guidance from qualified and trusted financial and tax advisers when filing your return (or beforehand) can help you develop personalized strategies to manage RMDs effectively.
Common strategies some taxpayers use to minimize the tax impact of RMDs include but are not limited to Qualified Charitable Distributions (QCDs), considering Roth conversions, and planning withdrawals to reduce taxable income and stay within lower tax brackets.
Also, consulting with a financial adviser to understand how RMDs affect estate planning can help you make informed decisions about inheritance strategies. Doing so can minimize tax burdens for heirs and beneficiaries.
Learning about RMDs is crucial for managing income in retirement. By viewing RMDs as part of an overall retirement income strategy, retirees can ensure a steady income while preserving retirement savings for future needs.
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Senior Tax Editor, Kiplinger.comAs the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist.
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