# Required Minimum Distributions: What to Know

January 10, 2024
Guidelines, deadlines, and potential tax consequences: What you need to know when it comes to required minimum distributions (RMDs).

For many investors entering their 70s, diligently contributing to tax-deferred retirement accounts must soon turn to diligently drawing them down. That's because the government requires retirees to take required minimum distributions (RMDs) from such accounts after a certain age.

"Many retirees are daunted by RMDs, in part because of the steep penalties for withdrawing too little," says Hayden Adams, CPA, CFP®, director of tax and wealth management at the Schwab Center for Financial Research. "But RMDs really aren't so complicated once you understand a few basics."

With that in mind, let's take a look at how to calculate your RMDs, how to manage the distributions effectively, and how to potentially reduce the associated tax hit.

## 1. Do the math

In general, once you reach age 73 (or 75 if you were born in 1960 or later), you must begin taking annual RMDs from all tax-deferred retirement accounts, including:

• 401(k), 403(b), and similar workplace retirement plans—including Roth 401(k)s if you haven't yet taken your RMDs for 2023 ( Certain qualified plans can allow for those still working to forgo RMDs until their employment is terminated. Starting in 2024, employees who have a Roth 401(k) will no longer need to take RMDs. )
• SEP IRAs
• SIMPLE IRAs

Generally speaking, you can calculate your RMDs for a given year by taking your account balance on December 31 of the prior year and dividing it by your "distribution period"—a number the IRS assigns to each age.

### Running the numbers

Age  Distribution period (DP)
73 26.5
74 25.5
75 24.6
76 23.7
77  22.9
78 22.0
79 21.1
80 20.2
81 19.4
82  18.5
83  17.7
84 16.8
85 16.0
86 15.2
87 14.4
88 13.7
89 12.9
90 12.2
91 11.5
92 10.8
93 10.1
94 9.5
95 8.9
96 8.4
97 7.8
98 7.3
99 6.8
100 6.4

For example, let's say you're 75, single, and ended last year with \$2 million in your IRA. According to the table above, your distribution period is 24.6—which means your RMD for the year would be \$81,301 (\$2,000,000 ÷ 24.6). If you have multiple tax-deferred retirement accounts, RMDs must be calculated separately for each one.

Many financial institutions, including Schwab, will calculate your RMDs for you—and may even offer automated withdrawals—but typically only for the accounts held at their firms. "Those looking to streamline their RMDs might consider consolidating their retirement accounts with a single firm to reduce the odds of withdrawing too much or too little," Hayden says.

## 2. Take the money—or else

You must withdraw your entire RMD amount by December 31 of each year, with two possible exceptions:

• It's your first RMD. You may choose to delay your first RMD until April 1 of the year following your 73rd birthday (75th birthday for those born in 1960 or later). However, delaying your first distribution means taking your first and second RMDs in the same tax year, which could significantly increase your taxable income. "This strategy may make sense if you're still bringing in steady income," Hayden says. "But for most people, it's usually better to take the distribution by the end of the year rather than wait until April 1."
• You're still working. If you're enrolled in your current employer's qualified retirement plan and you don't own more than 5% of the business, you may be able to delay taking RMDs from that account until April 1 of the year after you retire—check with your plan administrator to confirm. However, you must continue taking RMDs from all other tax-deferred retirement accounts.

Those with significant savings should carefully consider whether it makes sense to delay withdrawals. "By postponing those distributions, you're allowing your savings to potentially grow even more in the intervening years," Hayden says. "That's not bad per se, but it does mean you could see a significant bump in the size of your RMDs, and thus your tax bill, once you retire."

If you miss a deadline or don't withdraw your full RMD, you'll owe a penalty tax of up to 25% of the amount you failed to withdraw. For example, if your RMD was \$100,000 but you withdrew only \$50,000, you'd owe a quarter of the shortfall (\$12,500) as a penalty.

As for when in the year to take your RMDs, it will ultimately depend on your income needs and personal preferences. For example, some may choose to take a lump-sum distribution at the beginning of the year so they don't have to think about it again until the following year, while others might find that taking regular withdrawals is the simplest way to meet their RMD requirements and manage their cash flow. However, Hayden cautions against waiting to take RMDs until the end of the year. "You don't want to accidentally forget about them during the holidays," he says.

Regardless of when and how you take your withdrawals, you should view it as an opportunity to revisit whether your asset allocation is still in line with your risk tolerance and rebalance as needed.

"That way, you're satisfying your RMDs for the year and ensuring your portfolio continues to be aligned with your goals," Hayden says.

## 3. Be tax smart

Retirees sometimes find that their RMDs provide more income than they need in a given year. "What's more, when combined with other income sources, like dividends and interest payments, RMDs can push you into a higher tax bracket and could affect the taxation of Social Security benefits and the premiums you pay for Medicare," Hayden says.

If you're worried about the effects of RMDs on your tax bill and health care costs, there are several strategies you can employ:

### Make withdrawals prior to your RMD age

Once you reach age 59½, you can make penalty-free withdrawals from tax-deferred accounts. The distributions are still taxed as ordinary income, but over time they will reduce the size of your tax-deferred accounts—and hence your RMDs.

When employing this strategy, it helps to think of it as tax-bracket optimization. For example, if you're a joint filer in the 24% tax bracket and you have \$250,000 in taxable income from a business, you could withdraw another \$133,900 from your tax-deferred accounts and stay in your current tax bracket in 2024.

"The idea is to select a tax bracket that makes the most sense for your circumstances—and then fill up that bracket with distributions from your tax-deferred retirement accounts each year," Hayden says. "Those funds can then be reinvested in a taxable brokerage account, and if invested tax efficiently, could produce very little additional taxable income each year."

#### Now vs. later

Drawing down tax-deferred accounts without penalty starting at age 59½ can reduce your RMDs—and help keep taxes in check.

##### Scenario 1: With pre-RMD withdrawals

Source: Schwab Center for Financial Research.

Calculations are based on RMDs for tax years 2024 and beyond and assume a married couple with \$250,000 in combined taxable income and \$2.5 million in combined tax-deferred accounts at age 59½. Annual growth of 6% is added to the account balance at the end of each year, and nonportfolio income and tax brackets increase by 2% annually to account for inflation (based on current tax rates). This hypothetical example is only for illustrative purposes.

##### Scenario 2: Without pre-RMD withdrawals

Source: Schwab Center for Financial Research.

Calculations are based on RMDs for tax years 2040 and beyond, for an RMD age of 75. Example assume a married couple with \$250,000 in combined taxable income and \$2.5 million in combined tax-deferred accounts at age 59½. Annual growth of 6% is added to the account balance at the end of each year, and nonportfolio income and tax brackets increase by 2% annually to account for inflation (based on current tax rates). This hypothetical example is only for illustrative purposes.

### A Roth IRA conversion

Another way to optimize your tax bracket and potentially reduce future RMDs is to convert some of your tax-deferred savings to a Roth IRA in the years leading up to your RMD age, since such accounts aren't subject to RMDs. "Instead of taking the pre-RMD withdrawals and investing the funds into a taxable account, you could use those funds to do a Roth conversion each year until you reach your RMD age," says Hayden.

You'll have to pay tax on the converted amount in the year the conversion occurred, so it's generally a good idea only if you think your tax bracket in retirement will be equal to or higher than it is now. "Taxes are historically low, so it's possible they could go up in the future," Hayden says. "But the decision ultimately comes down to whether you're comfortable locking in today's tax rates on the converted funds."

### A qualified charitable distribution

A QCD allows individuals age 70½ and older to donate up to \$105,000 for tax year 2024 (indexed for inflation) from an IRA directly to charity—and use some or all of those funds to satisfy RMDs for the year.

For example, if your RMD for the year is \$100,000 but you need only \$50,000 of that, you could donate the remaining \$50,000 via a QCD to satisfy the rest of your RMD.

"QCDs can be a great tool for philanthropy as well as managing taxable income in retirement," Hayden says. "Just be aware that QCDs are not permitted from 401(k)s or other qualified plans.

#### Cash vs. QCD

Taking your full RMD and then donating cash could result in a higher tax bill than if you were to give through a QCD.

##### Scenario 1

Take RMD of \$100,000 and donate \$50,000 in cash

Nonportfolio income: \$50,000

Annual RMD: + \$100,000

QCD: + \$0

Pretax income: = \$150,000

Itemized deduction: –\$50,000

Taxable income: = \$100,000

Estimated taxes due: \$17,394

Take RMD of \$100,000 and donate \$50,000 in cash

Nonportfolio income: \$50,000

Annual RMD: + \$100,000

QCD: + \$0

Pretax income: = \$150,000

Itemized deduction: –\$50,000

Taxable income: = \$100,000

Estimated taxes due: \$17,394

##### Scenario 2

Take RMD of \$50,000 and donate \$50,000 using a QCD

Nonportfolio income: \$50,000

Annual RMD: + \$100,000

QCD: –\$50,000

Pretax income: = \$100,000

Standard deduction: –\$15,700

Taxable income: = \$84,300

Estimated taxes due: \$13,859

Take RMD of \$50,000 and donate \$50,000 using a QCD

Nonportfolio income: \$50,000

Annual RMD: + \$100,000

QCD: –\$50,000

Pretax income: = \$100,000

Standard deduction: –\$15,700

Taxable income: = \$84,300

Estimated taxes due: \$13,859

Illustration is for example purposes only and is not intended to be tax advice. RMD amount is approximate and assumes an IRA balance of \$2.5 million. Itemized deduction assumes the cash donation only and does not include other itemizations. Tax calculations are estimated using 2023 federal tax brackets, do not reflect state taxes, and assume that 85% of Social Security benefits are taxable. In 2023, the standard deduction for a single filer age 65 and older is \$15,700 (\$13,850 standard deduction plus \$1,850 additional standard deduction).

When implementing an RMD-reduction strategy, there's no substitute for personalized advice from a tax professional who knows the details of your individual situation. "A professional can help you anticipate potential challenges and consider how these strategies fit into your overall financial plan," Hayden says.

A rollover of retirement plan assets to an IRA is not your only option. Carefully consider all of your available options which may include but not be limited to keeping your assets in your former employer's plan; rolling over assets to a new employer's plan; or taking a cash distribution (taxes and possible withdrawal penalties may apply). Prior to a decision, be sure to understand the benefits and limitations of your available options and consider factors such as differences in investment related expenses, plan or account fees, available investment options, distribution options, legal and creditor protections, the availability of loan provisions, tax treatment, and other concerns specific to your individual circumstances.

Investing involves risk, including loss of principal.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Roth IRA conversions require a 5-year holding period before earnings can be withdrawn tax free and subsequent conversions will require their own 5-year holding period. In addition, earnings distributions prior to age 59½ are subject to an early withdrawal penalty.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.

Rebalancing does not protect against losses or guarantee that an investor's goal will be met. Rebalancing may cause investors to incur transaction costs and, when a non-retirement account is rebalanced, taxable events may be created that may affect your tax liability.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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