If you're approaching age 73 (or already there), you've probably heard whispers about Required Minimum Distributions, or RMDs. You may have received notices from your 401(k) provider, or your financial advisor has started mentioning them in conversations. But what exactly are RMDs, and more importantly, how can you navigate them without unnecessarily enriching the IRS?
Think of RMDs as the government's way of saying, "You've had a nice, long tax holiday with that retirement account – now it's time to pay the piper." But here's the thing: with the right strategies, you can turn what feels like a tax burden into an opportunity for smart wealth management and legacy planning.
What Are RMDs?
RMDs are withdrawals you must take from most retirement accounts, like traditional IRAs and 401(k)s, starting at age 73. The goal? To make sure you pay taxes on money that’s been growing tax-deferred for years.
Key Facts
- When to Start: You must take your first RMD by April 1 of the year after you turn 73. After that, take them by December 31 each year.
- How Much: The IRS uses your account balance and a life expectancy factor to calculate your RMD. For example, a $500,000 IRA at age 75 means about $20,325 that year.
- Penalties: Miss an RMD and you’ll pay a 25% penalty on what you should have taken (but this can drop to 10% if you fix it quickly).
- Which Accounts: RMDs apply to traditional IRAs, 401(k)s, and similar plans—but not to Roth IRAs during your lifetime.
Smart Strategies
- Spread Out Withdrawals: Consider taking smaller amounts throughout the year to avoid a big tax bill.
- Give to Charity: If you’re 70½ or older, you can donate up to $100,000 from your IRA to charity—it counts as your RMD and doesn’t raise your taxable income.
- Roth Conversions: Before age 73, consider converting some traditional IRA money to a Roth IRA. You’ll pay taxes now, but it can lower future RMDs and leave tax-free money for your heirs.
- Reinvest Unneeded RMDs: If you don’t need the money for expenses, reinvest it in a taxable account or life insurance to keep building wealth.
Planning for Your Heirs
- Heirs’ Rules: Most non-spouse heirs must empty inherited accounts within 10 years, but spouses have more flexibility.
- Life Insurance: Using RMDs to pay life insurance premiums can create a tax-free legacy for your loved ones.
Your Action Plan
- Start Early: Don’t wait until you’re 73—plan ahead for the best results.
- Ask for Help: Consider talking to a financial advisor for personalized advice.
- Review Yearly: Laws and your situation can change, so check your plan each year.
With a little planning, RMDs can be more than just a tax bill—they can be a tool for smart wealth management and leaving a lasting legacy for your loved ones.
The NJM team would love to help you make the most of your retirement and then some! Ready to learn more? Register for our weekly webinar here, or schedule a 1 on 1 consultation here.
