When thinking about money and retirement, much of the focus is on saving, like building up a nest egg to last throughout your retirement. But once you hit retirement age, your attention may move to thoughts of how to maximize what you've saved for the long term.
If you have qualifying retirement accounts, you may want to pay attention to the new required minimum distributions (RMDs) regulations. Knowing the RMD rules can help you start planning around when you need to take withdrawals. You'll need to take into account the changes put in place by the SECURE Act 2.0, which extended the RMD start age.
Understanding these rules can help you develop a strategy and plan for retirement.
What is an RMD?
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- If you turned 72 in 2022 or earlier, the RMD start age remains 72.
- If you attain age 72 after 2022 and age 73 before 2033, the age for starting RMD start age is 73.
- If you turn age 74 after 2032, the RMD start age is 75.
Except for Roth IRAs (while the owner is still living), retirement accounts have RMDs. The IRS requires RMDs for the following plans:
- Traditional individual retirement accounts (IRAs)
- Simplified Employee Pension (SEP) IRAs
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs
- 401(k) plans, including Roth 401(k)s
- 403(b) plans, including Roth 403(b)s
- 457(b) plans, including Roth 457(b)s
- Profit sharing plans
- Other defined contribution plans
Even though Roth 401(k), Roth 403(b) and Roth 457(b) plans are listed as subject to RMDs, the Secure Act 2.0 removed that requirement and beginning in 2024 RMDs from those qualified Roth plans will be eliminated.
How the SECURE Act 2.0 changed the RMD rules
Americans are spending more time in retirement than ever before. According to the Social Security Administration, the average woman turning 67 today can expect to
The
How to calculate your RMD
The IRS has a
RMDs can
Tax implications to consider
When planning when to take your RMDs, there are two dates to pay attention to. First, if you turned 72 after 2022, you must take your first RMD by April 1 of the year after you turn 73. After that, you must take future distributions by December 31.
Taking multiple RMDs in one year may have
Review the scenarios and discuss your best option with a tax professional. For example, depending on your situation, you may find it's best to take one RMD the first year it's required versus pushing it back until the following year and needing to pay taxes on two RMDs.
Penalties for not taking an RMD
The IRS requires you to take your RMDs. If you don't, the IRS imposes a 25% tax penalty (this was reduced by the SECURE Act 2.0 from the previous 50%) on the amount you haven't withdrawn on top of the income taxes you already owed for the required amount. For example, if you've determined your RMD is $5,000 and you don't take it, the IRS may give you a $1,250 penalty.
The same is true if you only take a portion of your RMD. If you have a $5,000 RMD and withdraw only $3,000 of it, you may receive a $750 penalty for the amount you didn't take—and you still need to withdraw the remaining $2,000. If you're worried about penalties, speak with your financial advisor. Many custodial accounts automatically calculate and withdraw RMDs for you.
There are some exceptions to this rule. If you made an honest mistake and forgot or made an error calculating your RMD amounts, you can ask the IRS to waive the penalties. To do so, fill out
How to potentially reduce your RMDs
You may think that once your RMD age hits, your only choices are to take your RMDs or pay a steep tax penalty for avoiding them. But you have some options to reduce or even avoid RMDs while still staying within the IRS guidelines.
Discuss some of these potential options with your financial advisor:
Delayed distribution options
If you're still working after your RMD age and don't own more than 5% of the company, your employer may offer a delayed distribution option. That may help you postpone taking an RMD from your qualified employer-sponsored plan until retirement. But if you have any other qualifying IRAs, you still need to take RMDs on those.
Roth conversions
You may choose to do a
Qualified longevity annuity contract (QLAC)
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In 2023, you can invest up to $200,000 of a retirement account into a QLAC to shield those funds from RMDs.
Donate to qualified charities
Another option to help reduce your RMDs is to consider charitable donations. You may decide to donate your RMD to a qualified charity through the
People age 70½ and older can also give a one-time gift of up to $50,000:
- Gifts can go to a
charitable remainder unitrust (CRUT),charitable remainder annuity trust (CRAT) orcharitable gift annuity (CGA). - For the gift to count, it must come from your IRA by Dec. 31.
In-kind transfers
You aren't required to withdraw your RMD in cash, so you may want to consider an in-kind transfer, where you move your RMD's worth of shares from an IRA account to a brokerage account. This is still considered a taxable distribution based on the market value of the shares at the time of transfer. Also, remember you may lose a portion of your investment if the market goes down.
Learn the younger spouse rule
Another IRS rule may help you if you're married to someone at least 10 years younger who is also the
The bottom line
Longevity is a part of any long-term retirement plan. No one knows when they'll pass away. However, having a strategy for how to distribute your savings during your retirement can help strike a balance between enjoying retirement and having your money last. Discuss your retirement ideas