Taxes
Required minimum distributions are the government’s way of eventually collecting tax on the pre-tax accounts you have spent decades building. Handled poorly, they can quietly inflate your tax bill for years.
What RMDs are and when they begin
Traditional IRAs and most workplace retirement plans grow tax-deferred, but that deferral does not last forever. Once you reach the required beginning age — currently 73 for most people — you must withdraw a minimum amount each year whether you need the money or not.
The amount is calculated by dividing your account balance by a life-expectancy factor published by the IRS, so it rises as a percentage of the balance as you age.
The tax traps to watch for
A large required distribution adds taxable income you cannot avoid, and that ripple can be expensive. It may cause more of your Social Security to be taxed and can push you into a higher Medicare premium tier through IRMAA two years later.
There is also a penalty for taking too little or missing the deadline, so the rules reward paying attention. For many retirees, the surprise is not the distribution itself but everything it touches.
How to plan ahead
The best RMD planning happens years before the first one is due. Converting some pre-tax money to a Roth in your lower-income years shrinks the future balance — and therefore the future RMDs.
If you are charitably inclined, a qualified charitable distribution lets you satisfy some or all of your RMD by giving directly from your IRA, without the amount counting as taxable income. A little coordination early can smooth out the spikes later.
Key takeaways
- RMDs begin around age 73 and grow as a share of your balance over time.
- A large RMD can tax your Social Security and raise Medicare premiums.
- Earlier Roth conversions and charitable distributions can soften future RMDs.
