RMDs and You
Tax-deferred retirement accounts like IRAs and 401(k)s have allowed your savings to grow without any immediate tax burden. However, once you reach a certain age, the IRS requires you to begin making withdrawals from these accounts – whether you need the money or not. These are known as required minimum distributions, or RMDs.
David Shapiro joins Better Money Boston with WCVB Channel 5 to discuss the important RMD facts you need to know, including when to start taking RMDs, how they’re calculated, and how they can impact your taxable income.
Knowing When to Start
The SECURE Act 2.0, passed by Congress in late 2022, established several new provisions to retirement planning rules, including adjusting the age at which retirees must begin taking RMDs. The age increased from 71 ½ to 72 with the passage of the original SECURE Act. As of today, with the SECURE Act 2.0, you are required to take your first RMD by April 1 of the year after you turn age 73. There’s even some speculation that lawmakers could raise the RMD age to 75 as life expectancies continue to rise.
Calculating Your RMD
A financial advisor can calculate exact numbers for you, but your specific RMD is essentially the value of all your retirement accounts at the end of the previous year, multiplied by a percentage based on your age. While you are only required to withdraw the minimum amount, you are free to take more if needed. However, keep in mind that any additional distributions above your RMD will still be subject to taxes.
Avoiding Hefty Penalties
It’s important to calculate and plan accordingly for taking RMDs. If for some reason you choose not to take an RMD or withdraw less than required, you will be penalized by the IRS. This can be a substantial penalty, too – as high as 25% on every dollar not withdrawn properly. To avoid this, make sure to stay on top of the withdrawal schedule each year with the guidance of your financial advisor.
Reducing Your Tax Burden
RMDs are taxed as ordinary income, and withdrawals count toward your total taxable income for that year. Depending on your total earnings, this additional income could push you into a higher tax bracket. It could also have a wide-reaching impact on Medicare premiums, Social Security taxes, marginal tax rates, and capital gains taxes. If you have the flexibility, there are ways to minimize your overall tax obligation, such as shifting the timing of your withdrawals.
Understanding and planning for RMDs is a crucial part of retirement planning. Consulting a financial advisor can help you navigate any future rule changes and create a withdrawal strategy that reduces taxes and supports your overall financial goals.
Download Now
Tax Explorer
Paying taxes is painful – but not nearly as bad as not having the funds to enjoy your retirement. This guide contains 10 strategies that could help minimize taxes on your retirement income.
Information presented in our podcasts is considered current as of the created date. Over time, some information presented may become stale. We recommend you consult with your Financial Professional before making any changes based on information contained here.
Johnson Brunetti is a marketing name for the businesses of JB Capital and JN Financial.
Investment Advisory Services offered through JB Capital, LLC. Insurance Products offered through JN Financial, LLC.
The guarantees provided by any type of insurance contract are based on the claims-paying ability of the insurance company.
Related Resources
-
What to Consider Before Moving in Retirement
If you have the liberty to relocate in retirement, does that mean you should? Maybe you’re a snowbird who wants to live down South full-time, or maybe you want to stick it out in the cold and spen… -
Dodging the Tax Torpedo
When envisioning the next chapter of your life, the impact of taxes can often be overlooked or forgotten altogether. The reality is, without the proper planning, you may be at the mercy of an impe… -
How to Financially Plan for a New Presidential Administration
A new presidential administration is set to take office next year, and while there are a lot of uncertainties around what a second Trump term could bring, it’s important to stay the course in your… -
Magic Retirement Number
Do you know your magic retirement number? This is the amount of money you need to retire – and it’s different for everyone. Let’s explore how to calculate your number, how it compares to the rest … -
Should I Consolidate My Multiple 401(k) Accounts?
If you’ve contributed to multiple 401(k) or other employer sponsored plans over the years, you may be wondering about today’s question, is it time to roll your old accounts into an IRA? In this we… -
Social Security Review: How to Get it Right
Social Security may be just one piece of the puzzle, but the decisions you make about when and how to claim your benefits can be crucial to the stability and strength of your overarching retiremen… -
When Should I Consider Borrowing Against My Assets?
Welcome back to the Money Wisdom Question Series. Today’s question is, when would it be beneficial to borrow against my assets? While there are ways to borrow against assets such as a vehicle, we’… -
Reaching the Retirement Mountain
The journey to and through retirement is like climbing a mountain. Climbers must diligently prepare for every aspect of their voyage – the climb up, reaching the top, and coming back down. You wan… -
How Do I Avoid Tax Bracket Creep?
Today’s question is central for anyone who wants to avoid an unpleasant surprise come tax season: what can I do to prevent tax bracket creep? Jake Doser, CFP®, CPWA® joins the Money Wisdom Questio… -
FAQ on Retirement Planning
At Johnson Brunetti, we are committed to helping you navigate your financial concerns as you approach one of the most complex yet rewarding phases of your life. This week, Joel Johnson, CFP®, join…