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Required Minimum Distributions - A Primer

As a part of our planning process, we often work with clients to model distribution strategies in retirement. For clients who retire before 65, we need to consider health care costs before Medicare eligibility. How will we fund living expenses prior to Social Security and Required Minimum Distributions (RMDs)? What is the tax impact of IRA distributions on the plan? Should IRA distributions begin before your required beginning date or should you wait as long as possible? If you do not need the cash flow from your RMD, should you consider making charitable gifts to reduce the tax impact? Should your RMDs be used to fund insurance premiums for long term care or life insurance to meet an estate planning goal?

Each client’s circumstances are unique – taking the time to create a well thought out financial plan can guide your savings goals and decisions (pre-tax vs. Roth?) before you retire. Planning will also provide clarity on how to best utilize your taxable and retirement accounts to maximize your lifestyle and reach your retirement goals.

We thought providing the below would be an important introduction to RMDs. If you have specific questions, please contact me at jessica.margetson@invictuspw.com or 720-734-2452.

What are Required Minimum Distributions? (Hereafter referred to as RMDs)

RMDs are the minimum amounts one must withdraw from specified retirement accounts each year. Distributions must be taken from Traditional IRA, SEP IRA, SIMPLE IRA and pre-tax retirement plan accounts (with limited exceptions) on an annual basis once you reach RMD age. 

Account owners in a workplace retirement plan (such as a 401(k) or profit-sharing plan) may delay taking RMDs until the year after they retire, unless they are a 5% owner of the business sponsoring the plan.

Roth IRAs do not have RMD requirements.

RMD Preparation

For those of you who take required minimum distributions, we will contact you to discuss your preferences for taking distributions from your qualified retirement account. We will calculate your RMD for both individual and inherited accounts. Because the rules have changed in the past several years, I want to share some detailed information about RMDs to assist your preparation for potential impacts to your cash flow and financial plan. Whether you already started taking distributions from your retirement accounts or you have many years until retirement, it is helpful to understand how RMDs will affect your tax situation and funding for other retirement goals.

When do I need to start taking my RMD?

In recent years, Congress passed two laws that impact RMDs (among other retirement plan provisions) known as SECURE Act 1.0 and SECURE Act 2.0. The chart below summarizes updates to the date RMDs must begin.


How much do I have to take out each year?

The amount you must withdraw is a function of your age and retirement plan balance at the end of each year. The first year you take an RMD, the distribution will be equal to roughly 4% of your account value at the end of the previous year. We will calculate your RMD for you and ask you the amount you want withheld for Federal and State income tax.

How will I be taxed?

Retirement account distributions, including RMDs, are taxed as ordinary income. The taxation of retirement account distributions is different than non-retirement accounts, where taxpayers typically pay tax annually on interest, dividends and capital gains. Your income tax bracket and personal tax situation will ultimately determine how much tax you pay on RMDs. Roth IRA distributions are tax free as long as the distributions are qualified.

Pre-tax retirement account contributions are deducted from your adjusted gross income, which can have a positive tax impact, especially if you are in a high income tax bracket while you are working. Gains in retirement plan accounts are tax deferred until distribution. However, the IRS will collect tax revenues eventually, which is why account owners are forced to take distributions and pay taxes over time.

Traditional vs. Roth?

In the simplest terms, the difference between traditional and Roth retirement plans is the decision to pay tax now or pay tax later. Traditional retirement plan contributions can reduce current taxable income; however, you will pay income tax at distribution. Roth contributions are not tax deductible, meaning they are made with after-tax dollars. No tax is due when funds are withdrawn from Roth IRAs if distributions are qualified. RMDs are not required from Roth accounts because contributions have already been taxed.

For some, it makes sense to make traditional pre-tax contributions to reduce current taxable income, especially those who will be in a lower tax bracket when they no longer have employment income. Others will remain in a high tax bracket when they retire. This is why planning is so important, even well in advance of retirement.

How are RMDs different for Inherited IRAs?

Secure Act 1.0 changed how inherited IRAs are treated. If you inherited an IRA from someone other than your spouse before January 1, 2020, your RMDs will be spread over your lifetime. If you inherited an IRA from someone other than your spouse after January 1, 2020, you must take RMDs AND the entire balance of your account must be distributed (and therefore taxed) by the 10th anniversary of the decedent’s passing. In other words, the new law accelerated the pace at which beneficiaries must pay tax on inherited retirement accounts. Generally, inherited Roth IRAs are subject to the same RMD and distribution rules as Traditional inherited IRAs. For those still working, the additional tax resulting from inherited IRA distributions can be tricky to navigate.

Qualified Charitable Distributions

A strategy that provides relief from income taxes is charitable donations from retirement accounts. Individuals may give up to $100,000 to qualified charities each year in the form of qualified charitable distributions. These distributions satisfy RMD requirements but are not recognized as taxable income. This strategy can be extremely valuable for retirees in higher income tax brackets who do not need RMDs to support cash flow. The obvious benefit is a reduced tax liability. It is important to consider that taxation of social security benefits and Medicare premiums are based on adjusted gross income, both of which can be mitigated by using the QCD strategy.