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—regardless of whether you need the money immediately.
If you have certain retirement accounts, such as traditional individual retirement accounts (IRAs) or 401(k)s, you must take RMDs, or
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 401(k)s 403(b)s 457(b)s SIMPLE IRAs SEP IRAs Defined contribution plans
- Profit-sharing plans
The act has also changed RMD age requirements. It used to be 72, but your RMD age will now depend on the year in which you were born.
If you were born in:
- 1950 or earlier: Your RMD start date is at age 72
- Between 1951-1959: Your RMD start date is at age 73
- 1960 or after: Your RMD start date is at age 75
If you turn 73 in 2023, you must take your first RMD by April 1, 2024. Then, in subsequent years, you should take the distribution by Dec. 31. If you delay your first RMD until the start of 2024, you may have to pay two distributions, one for 2023 and 2024.
If you're still working at your RMD age and don't own 5% of the company you work at, you may delay taking RMDs from that employer-sponsored 401(k) until you retire.
RMDs are taxable, and you must continue them until you deplete your account. If you don't take your RMDs, the SECURE Act 2.0 imposes a 25% penalty on the shortfall starting in 2023. If you fix your mistake during a corrections window, the penalty may drop to 10%. You still need to pay any penalty plus 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.
The easiest way to calculate your RMD is to ask the administrator of your account, but you can also calculate it yourself using a
- Your age
- Your account balance as of December 31 of the previous year
- The most recently updated
Uniform Lifetime Table
Using your information and the table, look for the life expectancy factor associated with your age. For example, per the 2022 table, a 75 year old has a life expectancy factor of 24.6.
To determine the RMD, divide your account balance by the life expectancy factor. Using the example above, if that 75-year-old had $200,000 in a traditional IRA at the end of the previous year, that balance divided by 24.6 would put that person's RMD at $8,130.08.
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
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 your RMDs for living expenses
Many retirees use RMDs to cover routine expenses. Using the funds you worked so hard to save for 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 factor into your retirement budget. For example:
- Are you working part time?
- Do you have a pension partially funding your retirement?
- How much
Social Securitymight you be getting?1
2. Save or reinvest your RMDs
Saving your RMDs is another option. You may want to add to your
- A mutual fund may be appropriate if you like the potential of continued growth and want to explore investment options.
- An annuity is an option if you want potential earnings to grow tax-deferred and to provide for your heirs.
You may also delay taking RMDs on a portion of your retirement assets by transferring them to a
3. Complete a Roth IRA conversion
If paying taxes on your RMDs throughout retirement is a concern, you might consider completing a
- Diversifying your investment portfolio
- Alleviating concerns of future tax rates
- Maintaining your current tax bracket
- Avoiding RMDs
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.
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4. Pay college expenses
As college costs climb, students rely more on
Thanks to the SECURE Act 2.0, you may roll over a lifetime cap of $35,000 from a
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
6. Use RMDs to donate to charity
Supporting charity is an essential value for many. So you can use the deduction from donating your RMD to offset your tax liability while still doing good for causes that matter.
Here's what to know:
- Individuals over 70½ can give up to $100,000 (adjusted for inflation yearly) from a traditional or inherited traditional IRA tax-free.
- People age 70½ and older can give a one-time gift of up to $50,000.
- Gifts can go to a
charitable remainder unitrust(CRUT), charitable remainder annuity trust(CRAT) or charitable gift annuity(CGA).
- For the gift to count, it must come from your IRA by Dec. 31.
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
Talk to a financial advisor
As you consider all the options for your retirement accounts, your