Retirement required minimum distributions

With potentially thousands of dollars coming your way annually in the years ahead, you may need a strategy to get the most from your distributions.

Before you decide on a course of action in allocating your distributions, you should consult with a tax professional to make sure you’re making the best decisions based on your specific tax situation. If you expect to spend the money to cover retirement expenses, that’s probably an easy choice. Take the distribution, pay the taxes you owe, and use the money as needed. But if you are already receiving enough income to cover your bills through a job, Social Security or any pension or investment income, consider the following strategies to help you make the most of your distributions:

Donate it. If you donate your distribution—or a portion of it—to a qualified charity, the amount of the distribution you donate is taxable, but may qualify as a tax deduction. 

Make a qualified charitable distribution (QCD). When you reach 70½, you can request up to $100,000 in 2024 and $108,000 in 2025 be sent directly to a qualified charity as a non-taxable distribution from your IRA. The QCD also counts toward your RMD for the year once you reach age 73. But if you make deductible traditional IRA contributions and also request a QCD, the QCD amount will be reduced by the amount of the traditional IRA deductions.

The difference between donating money and requesting a QCD is for the donation, you pay taxes on taking the distribution, and may qualify for a tax deduction when you file your taxes for that year. The QCD does not require you to pay taxes on the distribution and may help reduce your income which may affect your tax rate. But you cannot claim the QCD as a deduction when filing your taxes.

Create an emergency fund. If you don’t already have an emergency fund, you may wish to use some of the after-tax distribution to set one up.

Fund your life insurance premiums. You may use RMDs to fund a life insurance policy. The policy could be used to defray the tax on your retirement assets that your family will receive. Or, you could name a charity as the beneficiary of your taxable retirement accounts, with your family being the beneficiary of your non-taxable life insurance.

Reinvest it. You may choose to invest your after-tax distribution in a mutual fund or other investment to potentially keep it growing. There are a wide range of mutual funds available—the choice depends on your investment objectives.

Start early and move some money to a Roth IRA. Even if you’re years away from turning 73, it may be helpful to plan ahead.

While you are not allowed to roll over your RMDs into a Roth IRA, you may be permitted to convert the remaining money within your retirement accounts to a Roth IRA. Keep in mind, however, that you would be required to pay taxes at your ordinary income rate on the money you convert in the year of the conversion. With a Roth IRA, all earnings can be withdrawn tax-free if you’re older than 59½ and your initial investment in the Roth IRA was made at least five years earlier.

Having a source of tax-free income could give you more flexibility in controlling your tax liability in future years. (Note that access to converted dollars before age 59½ has restrictions.) 

You can start the conversion process well before age 73—and you can continue the conversions until you’ve emptied your tax-deferred account—as long as you don’t convert your RMDs. 

Also, once your money is in a Roth IRA, you would no longer be required to take distributions during your lifetime. One of the key considerations is whether you can pay the taxes you will owe on the conversion from a separate source, rather than using your IRA assets to pay them. If you use IRA assets and you are under age 59½, you will owe the 10% early distribution tax on any funds not included in the amount converted to the Roth IRA.

Before making the decision to convert some or all of your tax-deferred account to a Roth IRA, you should carefully consider the tax consequences or speak with a tax professional to discuss the pros and cons. For instance, to help reduce the tax impact, you might consider spreading your conversions over several years—or waiting until you’re in a lower tax bracket to limit the tax burden.

But whether you withdraw the money now, or later when you’re required to take the annual distributions, you’re going to owe taxes at your ordinary income rate on all the money you withdraw. The decision you face is whether to take the hit sooner or later.

RMD strategies

How much of my money must I withdraw each year?

During your lifetime, required minimum distributions (RMD) are determined through a calculation based on your age and the relationship and age of your beneficiary(ies) and the amount of money in your account as of December 31 of the prior year.

You would divide the amount in your account by your projected life expectancy to determine your required minimum distribution.

Fortunately, you may be able to get some help from your plan administrator or tax professional. The trustee, custodian or issuer of your account must either report the amount of the distribution to you or offer to calculate it for you. Or you could use an online calculator to do the math. FINRA has an RMD calculator at its site. You can also consider setting up a systematic distribution that is taken timely each year.

Review for more information on RMDs and using life expectancy tables

When must I take my distributions?

You must take your first distribution the year you turn age 73, although the first payment can be delayed until April 1 of the following year. After the first year, all annual distributions must be taken by December 31 of that year. If you postpone the first year’s distribution, that means that in the year after you turn 73, you may have two required distribution dates – April 1 for the previous year and December 31 for the current year.

Can I make things easier by doubling my distribution one year so I can skip it the next?

You are not allowed to take required minimum distributions early, however, if you want or need it, you can take more than your required distribution amount in any year to cover expenses.

What if I don’t take the full required distribution?

You would be subject to a stiff penalty—a 25% excise tax on the amount of the required minimum distribution that you failed to take in a particular year. The penalty would drop to 10% if you take the full required distribution by the end of the second year following the year it was due.

You may withdraw more than your RMD at any time, but you must not withdraw less.

What if you have more than one applicable account?

If you have more than one IRA or other employer retirement accounts, you must calculate the required distribution separately for each account. You must then withdraw an amount equal to the total of the RMD for all your accounts.

You can withdraw the total RMD for your IRAs from one or more of your IRAs. Similar to an IRA, a 403(b) required distribution must be calculated separately for each 403(b) contract you own, but you can take the total amount from one or more of your 403(b) contracts.

However, required distributions from other types of retirement plans, such as 401(k) and 457(b) plans, must be taken separately from each of these account plans.

Where can I learn more about RMDs?

For further details, you can go to the IRS.gov RMD section.

Source: Internal Revenue Service, Publication 590-B (for 2018 returns), Distributions from Individual Retirement Arrangements (IRAs)