If you are taking RMDs and collecting Social Security benefits, the RMDs will not impact the amount of your benefits—but it could impact how much of your Social Security benefit is taxable. The amount your Social Security is taxed depends on your annual income. RMDs may increase your taxable income.
New for 2023: The Secure 2.0 Act raised the age that account owners must begin taking RMDs. For 2023, the age at which account owners must start taking required minimum distributions goes up from age 72 to age 73, so individuals born in 1951 must receive their first required minimum distribution by April 1, 2025.
The government sees RMDs as money you should pay taxes on, so you can't directly convert it into the Roth IRA savings like you can with the other money. However, once the post-taxed RMD money hits your bank account, you are free to invest that money as you wish within the Roth IRA guidelines.
For simplicity's sake, let's assume a hypothetical investor has one IRA with an account balance of $100,000 as of December 31 of the prior year. To calculate the RMD the year they turn 73, they would use a life expectancy factor of 26.5. So the RMD would be $100,000 ÷ 26.5, or $3,773.58.
Mistake #1: Not Starting Your RMD on Time
The rules for RMD starting ages have undergone changes in recent years, leading to confusion among many individuals. In the past, the starting age for RMDs was 70½. However, as of 2023, the starting age stands at 73 and is set to increase to 75 in the future.
If you're at least age 59½ and your Roth IRA has been open for at least five years, you can withdraw money tax- and penalty-free. See Roth IRA withdrawal rules.
Ultimately, this comes down to the choice that's best for your finances. Your money has the most potential for growth if you take your entire minimum distribution at the end of each calendar year.
Avoiding RMDs
There is the option to convert your traditional IRA into a Roth IRA—also known as a Roth IRA conversion. Since Roth IRAs don't have RMDs, you will no longer be required to take annual withdrawals once the funds are in the Roth.
Once you've started taking RMDs, consider using any RMD funds you don't need to invest in a 529 plan, which you can use for a wide range of educational expenses for the designated beneficiary of the 529 plan, including college and K-12 tuition, meal plans, books, laptops and room and board fees.
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
All distributions must be made by the end of the 10th year after death, except for distributions made to certain eligible designated beneficiaries.
What is the retirement tax bomb? The retirement tax bomb is a stealthy financial threat looming over many retirees. Stemming from the correlation between heavy reliance on tax-deferred accounts and the eventual obligation to take required minimum distributions (RMDs), this tax liability snowballs over time.
If you need or want more income sooner rather than later: Taking only the RMD and doing so at the end of the year is usually the most tax-efficient choice.
How Do RMDs Affect Medicare? When you withdraw money from retirement accounts, it's counted as taxable income. This increase in income can push you into a higher bracket, triggering higher Medicare premiums for Parts B and D. Your modified adjusted gross income (MAGI) is the key factor here.
The simple version says the Roth account needs to have been funded for five years before you withdraw any earnings—even after you've reached age 59½—or you could owe taxes. In addition, nonqualified withdrawals before that age could also trigger a 10% penalty.
When you convert to a Roth IRA, your taxable income for the year rises. A Roth IRA conversion may not make sense for you if you are in your peak earning years. Recall that when you convert money to a Roth IRA, your taxable income for that year increases, which could bump you into a higher tax bracket.
You must take your first required minimum distribution for the year in which you reach age 73. However, you can delay taking the first RMD until April 1 of the following year. If you reach age 73 in 2024, you must take your first RMD by April 1, 2025, and the second RMD by Dec. 31, 2025.
If you're reinvesting your RMD, you can't put that money back into a tax-deferred account like a 401(k) or traditional IRA. In some cases, you can invest it in a Roth IRA (which is not subject to RMDs), but there are some tricky caveats.
Remember, you must pay tax on your RMD. When you take your RMD, you can have state or federal taxes withheld immediately, or you may be able to wait until you file your taxes. Unless you give us different instructions, the IRS requires us to automatically withhold 10%7 of any RMD for federal income taxes.
You can make a penalty-free IRA withdrawal at any time during this period, but if you had contributed pre-tax dollars to your Traditional IRA, remember that your deductible contributions and earnings (including dividends, interest, and capital gains) will be taxed as ordinary income.
It is calculated by dividing an account's year-end value by the estimated remaining years of your lifetime, in a table provided by the IRS.
You can withdraw assets from an IRA at any age and time, but if you withdraw from a traditional IRA before the age of 59½, you may be liable for taxes, fees, and penalties.