Required Minimum Distributions Explained, #263
This week on the show, we’re discussing the specifics of Required Minimum Distributions (RMDs) as we head into the second half of 2025.
Whether you’re approaching your first year of RMDs or have been taking them for a while, I break down everything you need to know, from when you need to start taking distributions based on your birth year, to how RMDs are calculated, which accounts are affected, and the potential tax consequences for missing a withdrawal.
I’m also sharing eight practical strategies you can use to lower your future RMDs, including asset diversification, Roth conversions, tax-efficient income planning, optimizing Social Security timing, and even using charitable contributions to your advantage.
With real-world examples and actionable tips, this episode is packed with valuable insights for anyone looking to navigate their retirement withdrawals as tax-efficiently as possible.
You will want to hear this episode if you are interested in...
[02:48] Calculating your Required Minimum Distribution.
[05:02] IRA distribution factors & penalties.
[10:40] Retirement tax strategy tips.
[13:35] IRA conversion tax planning.
[15:37] Optimizing social security timing.
[18:48] Tax-efficient investment account strategy.
Smart Strategies to Manage Required Minimum Distributions (RMDs)
New rules over the past few years have pushed back when retirees must start taking RMDs. As of today:
If you were born in 1959 or earlier, your RMDs begin at age 73.
If you were born in 1960 or later, the threshold moves to age 75.
RMDs apply to traditional IRAs, rollover IRAs, SEP IRAs, SIMPLE IRAs, and most employer-sponsored plans, including 401(k)s and 403(b)s. Importantly, Roth IRAs are not subject to these mandatory withdrawals during the owner’s lifetime, providing an attractive planning opportunity.
How RMDs Are CalculateD
Your annual RMD is determined by dividing the prior year’s December 31 retirement account balance by a life expectancy factor from IRS tables.
Most people use the IRS Uniform Lifetime Table.
If your spouse is more than 10 years younger, you get a slightly lower withdrawal requirement by using the Joint Life Expectancy Table.
For example, if you are 73 with a $500,000 IRA, and the IRS factor is 26.5, your RMD would be $18,868 for that year. If you miss your RMD, penalties can be steep, 25% of the amount not withdrawn, though if corrected within two years, the penalty drops to 10%.
RMDs are generally taxed as ordinary income. If your IRA contains after-tax contributions, those aren’t taxed again, but careful tracking is essential. The key is smart, proactive planning.
RMDs increase your total taxable income, which can impact not just your IRS bill, but also Medicare premiums (thanks to the “IRMAA” surcharge) and eligibility for certain state tax breaks.
Eight Strategies to Lower RMD Impact
Here are several tactics to help retirees minimize RMDs’ sting and keep more of their wealth working for them:
1. Diversify Account Types Early
Don’t keep all retirement savings in pre-tax accounts. Consider a mix of pre-tax, Roth, and taxable brokerage accounts so you have flexibility in retirement to optimize withdrawals for tax purposes.
2. Build an Optimized Retirement Income Plan
Work with a financial advisor or CPA to design an intentional strategy for sourcing retirement income. With careful planning, you can potentially lower how much tax you’ll owe and avoid unwelcome surprises.
3. Do Roth Conversions When Taxes Are Low
If you retire before collecting Social Security (and RMDs), you might have years of low taxable income, a prime time to convert part of your traditional IRA to a Roth IRA at a low tax rate. Once in the Roth, future qualified withdrawals are tax-free.
4. Delay Social Security for Strategic Reasons
Delaying Social Security not only increases your monthly benefit but also gives you more low-income years for Roth conversions, thus reducing future RMDs.
5. Consider Working Longer
If you continue working past RMD age and participate in your employer’s retirement plan, you may be able to delay RMDs from that plan until you retire (as long as you don’t own more than 5% of the company).
6. Aggregate and Simplify Accounts
Roll over old 401(k) accounts into a single IRA if eligible. It’s easier to track, calculate, and satisfy RMDs, reducing the risk of costly missteps.
7. Optimize Asset Location
Hold faster-growing investments (like stocks) in taxable accounts and slower-growing ones (like bonds) in IRAs. This helps slow the growth of your RMD-producing accounts, keeping future required withdrawals smaller.
8. Use Qualified Charitable Distributions (QCDs)
Once you’re RMD-eligible, you can send up to $100,000 per year directly from your IRA to charity. It will count toward your RMD but won’t be taxed, potentially a win-win for you and your favorite causes.
Resources Mentioned
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Retirement topics - Required minimum distributions (RMDs) | Internal Revenue Service