Planning for retirement involves more than just saving; it also requires understanding the rules around how you can withdraw those savings. One important rule that comes into play after you reach a certain age is the "Required Minimum Distribution," or RMD. If you're unsure what RMDs are or how they affect your retirement planning, this guide will help make things clearer with answers to frequently asked questions from our retirement coaches at RetireWise.

What Is a Required Minimum Distribution (RMD)?

A Required Minimum Distribution, or RMD, is the minimum amount you have to start withdrawing from certain retirement accounts once you reach a specific age. The RMD rule applies to tax-deferred retirement accounts, including:

Traditional IRAs
401(k)s
403(b)s
Other similar retirement accounts

These accounts are tax-deferred, which means you didn't pay taxes on the money when you initially contributed. The IRS requires RMDs to ensure that taxes are paid on these funds at some point, which is why withdrawals become mandatory after a certain age.

When Do You Have to Start Taking RMDs?

For most retirement accounts, you're required to start withdrawing RMDs at age 73. However, if you turned 72 before 2023, your RMDs may have already begun. You must withdraw your first RMD by April 1 of the year following the year you reach 73. After that, RMDs must be taken by December 31 every year. For example, if you turn 73 in 2024, you need to take your first RMD by April 1, 2025. Afterward, you'll complete one withdrawal every year by December 31.

How Are RMD Amounts Calculated?

The amount you need to withdraw for an RMD is based on two factors:

Your account balance: the total value of your retirement account(s) at the end of the previous year.
Life expectancy factor: based on an IRS table that estimates how long you're expected to live based on your age.

To calculate your RMD, divide your account balance by the life expectancy factor provided by the IRS. For example, if you have $500,000 in your IRA and your life expectancy factor is 25.6, your RMD would be approximately $19,531.

What Happens If You Don't Take Your RMD?

Missing an RMD can be costly. If you forget to take an RMD or don't withdraw enough, the IRS will charge a penalty. This penalty is equal to 25% of the amount you were supposed to withdraw, although it may be possible to lower the penalty if you correct the mistake quickly. For example, if your RMD is $10,000 and you don't take it, you could owe a $2,500 penalty on top of paying taxes on the missed withdrawal.

How Do RMDs Affect Taxes?

When you withdraw an RMD, it's treated like regular income, which means you'll need to pay income tax on the amount. This can affect your tax bracket, especially if you have multiple income sources in retirement. Investment portfolio management with a retirement coach can help you reduce this potential tax burden by strategizing a plan that meets your retirement goals.

Can You Withdraw More Than Your RMD?

Absolutely! The RMD is just the minimum amount you must withdraw. You're free to take out more if you wish, though remember that all withdrawals are subject to income tax. Taking out too much at once might push you into a higher tax bracket, so it's wise to work with a financial advisor to plan your withdrawals carefully.

Planning for RMDs with RetireWise

RMDs are just one piece of the retirement puzzle, but they can significantly impact your financial picture. Knowing the rules, planning your withdrawals, and working with a retirement expert can help you stay on track and minimize your tax burden. At RetireWise, we specialize in helping people like you understand the ins and outs of retirement planning. Contact RetireWise today for a free consultation and learn how we can help you make the most of your retirement savings.

Understanding Required Minimum Distributions (RMDs) and Your Retirement