As you approach retirement, Required Minimum Distributions (RMDs) become an unavoidable part of managing your retirement accounts. Whether you’re a high earner or have accumulated significant savings over the years, it’s essential to approach RMDs with a clear strategy. 

The decisions you make now can significantly impact your tax liability, legacy, and overall financial health. Below are eight key questions to ask yourself when reviewing your RMD plan, designed to help you make informed decisions and maximize your financial efficiency.

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What Is an RMD, and Why Does It Matter?

RMDs are the minimum amounts you must withdraw annually from your retirement accounts, such as traditional IRAs or 401(k)s, starting at age 73 (due to the SECURE Act 2.0). While RMDs ensure you pay taxes on the tax-deferred funds you’ve accumulated, they can also present tax planning challenges. 

The key is managing these withdrawals efficiently to avoid costly penalties and unnecessary tax burdens. RMDs should not be treated as just another withdrawal. 

Depending on how far out from retirement you are you may be able to minimize or completely eliminate RMDs. Especially if the RMD will push you into a higher tax bracket. 

This is a common oversight, and one that can be prevented with proper planning.

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1. When Must You Start Taking RMDs?

The age you must start taking RMDs has shifted with new legislation. Now, if you turned 72 after January 1, 2023, you can delay your first RMD until age 73, with a grace period until April 1 of the following year. If you delay, keep in mind that you’ll need to take two RMDs in one year, which can significantly increase your tax liability.

If you’re still working and contributing to a 401(k), you might be eligible to delay RMDs from that account. This exception doesn’t apply to IRAs, though, so understanding where your accounts are held is important.

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2. How Is Your RMD Calculated?

The IRS uses a formula to calculate your RMD. It takes the total balance of your tax deferred retirement accounts and divides it by a life expectancy factor, determined by the IRS’s Uniform Life Table. The larger your account balance, the bigger your RMD, which could increase your taxable income.

Let’s take an example of someone that has his entire portfolio in tax deferred accounts. When he started taking RMDs, his taxable income skyrocketed, creating unattended tax issues. If you’re in a similar situation, consider whether some tax diversification might benefit you before RMDs begin.

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3. Are You Prepared for the Tax Implications of RMDs?

RMDs are taxed as ordinary income, which can have a ripple effect on your finances. Larger RMDs may push you into a higher tax bracket, affect Medicare premiums, and increase the taxability of your Social Security benefits. 

Therefore, it’s essential to be proactive with your tax planning. One strategy is to adjust your withholding or estimated payments to avoid surprises. 

Another is considering how Roth conversions could reduce future RMDs. 

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4. What Happens If Your RMD Is More Than You Need?

For many high earners, their RMD often exceeds their need to support their lifestyle. If this is the case, consider reinvesting the RMD in a non-qualified account. 

This allows your money to continue growing instead of sitting idle in cash, unless you need to replenish your emergency fund. I’ve found that, when RMDs far surpasses your immediate lifestyle needs, they become additional tools for giving, legacy planning, and tax mitigating. 

For instance, reinvesting RMD withdrawals can assist in continuing to grow your wealth. It’s a great way to make the most of your RMD while keeping your financial plan aligned with your goals.

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5. What Should You Do If Your Account Value Changes?

Market volatility can significantly impact the value of your retirement accounts. If your account balance is higher due to recent market gains, you might want to accelerate your withdrawals, locking in those gains. 

On the other hand, if your balance is lower, spreading out or delaying withdrawals could help you avoid selling assets at a lower value.

I often remind clients that we are keeping an eye on market conditions when planning their RMD. For example, adjusting overall retirement account withdrawals (not RMDs) when the market takes a downturn.

This prevents liquidating assets during a slump. Timing your withdrawals thoughtfully can make a big difference in your overall financial picture.

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6. Have You Inherited a Retirement Account?

If you’ve inherited a retirement account, the RMD rules are different. Under the SECURE Act, non-eligible designated beneficiaries must withdraw the entire account balance within 10 years of the original account holder’s death. 

If you’re an eligible designated beneficiary, like a surviving spouse, you may have more flexibility, but it’s essential to know which rules apply to your situation.

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7. Can You Use Charitable Contributions to Satisfy RMDs?

If you’re over 70.5 and charitably inclined, a Qualified Charitable Distribution (QCD) allows you to donate up to $105,000 directly to a charity from your IRA. This donation counts toward your RMD but isn’t included in your taxable income. 

QCDs can reduce your Adjusted Gross Income (AGI), which might help keep you in a lower tax bracket and prevent other tax related issues like higher Medicare premiums.

Therefore, giving back can be beneficial two fold:

• give back to cause(s) that you have an affinity towards
• and not spike your taxes in the process. 

If you’re already giving to charity, this is a tax efficient way to align your giving with your RMD.

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8. How Do RMDs Fit Into Your Overall Financial Plan?

Your RMD is just one piece of the puzzle. It’s essential to look at the bigger picture and how these mandatory withdrawals affect your cash flow, tax strategy, and long-term legacy planning.

For instance, combining pre-RMD planning with Roth conversions or charitable giving can significantly reduce your taxable income, but this requires a proactive approach.

With clients I am reviewing their RMDs as part of our annual financial review. Managing RMDs within the context of your total financial plan ensures you’re not leaving any money on the table.

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What’s Next…

RMDs can feel like a chore, but they’re an essential part of your retirement strategy. By asking yourself these eight questions and working closely with a financial planner, you can ensure you’re handling your RMDs in the most tax efficient and financially prudent way.

If you need help navigating your RMDs, consider reaching out to tailor a plan to your specific financial situation. A little planning goes a long way in ensuring that your wealth continues to grow and support the life you’ve worked so hard to build.