Regardless of where you are in your retirement planning journey, required minimum distributions (RMDs) are a key factor to keep in mind. Gaining clarity on RMDs now can help you make more informed financial decisions down the road and potentially lower your future tax liability.

In this week’s Better Money Boston with WCVB Channel 5, David Shapiro outlines what you need to know about RMD timing, taxes, and planning strategies.

When RMDs Start

Under the SECURE Act 2.0, the age at which you must begin taking RMDs is now 73 — or 75 if you were born in 1960 or later. These rules have evolved over time, having previously been set at age 70½ and then 72. Given these ongoing adjustments, it’s essential to stay informed about the latest provisions to ensure your retirement strategy stays on track.

Which Accounts Are Subject to RMDs

RMDs apply to most tax-deferred retirement accounts, including traditional IRAs, 401(k)s, 403(b)s, and 457(b) plans. They’re calculated based on the total value of these accounts as of the previous year. That balance is then used to determine the minimum amount you must withdraw each year.

You have the flexibility to take the distribution monthly, quarterly, or annually, as long as the full required amount is withdrawn by year-end. Ultimately, the IRS wants to make sure these tax-deferred funds are eventually taxed.

The Impact on Your Future Tax Burden

Whether it’s income you choose to take or an RMD you’re required to take, every dollar withdrawn from a traditional retirement account is taxed as ordinary income. That added income can have a ripple effect on other aspects of your financial life, including Medicare premiums, the taxation of your Social Security benefits, and your overall marginal tax rate. That’s why it’s important to have a solid tax strategy for timing your distributions to help minimize the impact.

Key Planning Considerations

There are also penalties for not taking your full RMD. The IRS closely monitors the size of your retirement accounts and your withdrawal history. If you fail to take the required minimum amount by the deadline, you could face up to a 25% penalty on the amount that was supposed to be withdrawn.

Your RMD strategy should be aligned not only with market conditions but also with the specifics of your investment portfolio. Your approach will also vary depending on which accounts the withdrawals come from, as other accounts, such as Roths, do not have RMDs.