Required Minimum Distributions (RMDs)

RMDs confuse many but once you understand the nuances you can plan effectively and potentially save a lot in taxes.

When Do You Need To Start Taking RMDs?

The age at which you need to start taking RMDs depends on the year you were born. If you were born in 1950 or earlier, you start at age 72. For those born between 1951 and 1959, it's age 73. And if you were born on January 1, 1960 or later, your RMD begins at age 75.

How Much Will Your RMD Be?

The amount you're required to take as your RMD depends on two things: the value of your account that's subject to an RMD and your age. The IRS has a life expectancy factor for each age. For instance, if you were born in 1950, your current life expectancy would be 26.5 years. You'd then take your IRA or pre-tax account balance as of December 31st of the previous year and divide it by 26.5.

Strategies to Minimize the Impact of RMDs

1. Start early: Understanding the rules and starting your planning early can help you avoid penalties and reduce your tax burden

2. Diversify your retirement savings: Having a mix of taxable and tax-free accounts can give you more control over your income and taxes in retirement

3. Consider a Roth IRA conversion: This can help reduce the size of your RMDs and potentially save you in taxes over time. A conversion will result in a taxable event for contributions from your pre-tax retirement account (e.g., Trad. IRA, 403b, etc.) to a Roth account. However, once the upfront taxes are paid on the conversion the new Roth account is tax-free from capital gains and distributions for yourself and beneficiaries

What RMDs Mean For You

Understanding RMDs and how they work can help you plan your retirement more effectively, potentially saving you in taxes. Taxes are not the most fun topic but understanding and planning for them is an essential part of one’s overall financial plan.