After focusing on saving for decades, shifting your retirement money mindset to withdrawing those savings could take some effort. But once you’ve retired, that might be exactly what you must learn to do—whether you feel that you need the money or not.
If you have saved in certain retirement accounts, such as traditional IRAs or 401(k)s, you must begin taking RMDs, or required minimum distributions, from those accounts at age 72.
Here’s an overview of how required minimum distributions work, along with six ways you might use these savings.
How required minimum distributions (RMDs) work
The government introduced tax-deferred savings in the 1970s to encourage individuals to save for retirement. And, to ensure that retirees would eventually pay taxes on those accounts, the law set the age when withdrawals would be required to begin. You will have RMDs if you’re the original owner of tax-deferred retirement accounts including:
- Traditional IRAs
- 457 plans
- SIMPLE IRAs
- SEP IRAs
- Defined benefit plans
- Profit-sharing plans
Note that Roth IRAs do not have RMDs.
Your first RMD must begin by April 1 following the year you reach age 72. You will need to take RMDs from all of your qualified retirement accounts. The one exception is if you are still working at age 72, in which case your RMD from your employer’s plan may be delayed.1
RMDs are taxable and you must continue them until the entire account is depleted. What happens if you don’t take your RMD in any given year? You could pay a 50% penalty tax on your RMD in addition to the ordinary income tax due on the distribution.
How to calculate your RMDs
Your RMDs are determined each year by dividing the account’s prior year-end value by a life-expectancy factor set by the IRS.
For example, say the value of your traditional IRA is $100,000. At 75 years old, the life-expectancy factor in 2021 is 22.9, according to
The calculation is used for every qualifying account you own. Marital status only affects your RMD calculation if one spouse is at least 10 years younger than the other. In this case, use the
You can find the revised life expectancy tables
6 ways to use your RMDs
It’s worth noting that, as the name suggests, your required minimum distributions are the minimum amount you can withdraw from your retirement accounts each year. Depending on your strategy for using the funds, you may choose to withdraw more. There are many ways to use your RMDs in retirement, and we’re highlighting six of them.
1. Use RMDs for living expenses
Many retirees use RMDs exactly as they were intended—to cover routine expenses during retirement. Using the funds you worked so hard to save to support your retirement lifestyle is a worthy goal, especially if you don’t expect to be in a higher tax bracket during retirement since RMDs are taxed as ordinary income.
Think about how RMDs will factor into your retirement budget. Are you working part-time, or do you have a pension that is helping fund your retirement? How much Social Security will you be getting?
You can start on your own by completing this
2. Save or reinvest your RMDs
Saving your RMDs is another option. You may want to add to your
Depending on your situation, you might consider reinvesting some or all of your RMDs in a
3. Complete a Roth IRA conversion
If paying taxes on your RMDs throughout retirement is a concern, you might consider completing a Roth IRA conversion.2 Roth IRA conversions have several advantages, including portfolio diversification, alleviating concerns of future tax rates, keeping your current tax bracket and having no required minimum distributions.
The downside is your taxable income the year of the conversion will rise, and you will have to wait at least five years to withdraw the earnings on a tax-free basis. Additionally, you must satisfy your current year’s RMD requirement prior to the conversion. A Roth conversion may be appropriate if you:
- Won’t need the RMD income during your lifetime.
- Seek the potential for continued tax-deferred growth.
- Are in a lower tax bracket now compared to what you think you’ll be in at age 72.
- Believe your heirs will be in a higher tax bracket when they inherit these funds than the tax bracket you’re in now.
4. Pay college expenses for your family
As college costs continue to climb, families are relying more and more on financial help from parents and grandparents. If you don’t need RMDs for your retirement expenses, you may effectively reduce the size of your estate by using them to fund a tax-advantaged college savings account.
5. Use RMDs to pay for life insurance
Another RMD strategy can help you create a legacy beyond your lifetime for the benefit of your loved ones. If you’re healthy and don’t need RMDs for living expenses, you could use the after-tax portion to fund a life insurance policy. The death benefit of the life insurance could eventually be used to pay the taxes due on the IRA, leaving the full remaining value of the IRA for your loved ones.
Alternatively, if you could name a charity as the beneficiary of your life insurance contract, proceeds from the contract could support this cause after you pass away.
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6. Use RMDs for charitable purposes
If you don’t need the money and are charitably minded, you can receive a significant tax deduction to help offset the tax liability created by the RMD.
You could also consider naming a charitable nonprofit as a beneficiary of your retirement account so that the gift is made after you pass away. This option may be appropriate if you want to make a substantial charitable gift and would like to minimize the portion of your taxable estate.
Delay some RMDs with a qualifying longevity annuity contract
IRS regulations make it possible to delay taking RMDs on a portion of your retirement plan assets until you reach age 85 by transferring them into a qualified longevity annuity contract (QLAC). By doing so, you’ll receive higher guaranteed income payments and your retirement assets will last longer. The caveat, of course, is anticipating how long you’ll live. However, QLACs give you the ability to name a beneficiary, who would receive the assets after you die.
Talk to a financial advisor
As you consider all the options for your retirement accounts, your