For investors who plan to use their RMDs as a source of retirement income, a monthly payment may be a good choice. Keep in mind that while you'll pay the same amount of income tax no matter when you receive the money, delaying your RMD until year-end gives your money more time to grow tax-deferred.
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.
Time in the market > timing the market. Over the long run, with enough years to smooth out variability, the theoretically optimal date to take your RMD each year would be 12/31.
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.
Withdrawing money from your retirement portfolio in a down market may negatively affect your nest egg over time, known as the "sequence of returns risk." If your required minimum distribution is approaching and you don't need the funds, you may reduce this risk by keeping the money invested.
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.
Required minimum distributions (RMDs) are the minimum amount that you must withdraw from certain tax-advantaged retirement accounts. They begin at age 72 or 73, depending on your circumstances and continue indefinitely. There is, unfortunately, no age when RMDs stop.
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.
Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule). An RMD may be required in years 1-9 when the decedent had already begun taking RMDs.
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.
RMDs are reported to the IRS. IRA custodians must indicate on Form 5498, IRA Contribution Information, if an RMD is due for the year from that account and file Forms 5498 with the IRS by May 31 each year.
Cash flow management: Making monthly withdrawals allows you to treat this as a regular income. Many retirees prefer this style of cash flow over a lump sum format, as it helps with personal finance and budgeting. This is often the biggest advantage to making monthly or quarterly withdrawals.
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.
Older retirees with a steady income stream may prefer the predictability of monthly distributions. Your retirement expenses: If you have consistent retirement expenses, monthly RMDs can help with budgeting. If your expenses are variable, a lump sum might offer more flexibility.
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.
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.
Your first RMD must be taken by 4/1 of the year after you turn 73. Subsequent RMDs must be taken by 12/31 of each year. If you don't take your RMD, you'll have to pay a penalty, follow the IRS guidelines and consult your tax advisor.
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 choice of which money in the account to withdraw is up to you — the government does not have an opinion on this matter. You may have individual stocks, bonds, exchange-traded funds, mutual funds or any number of investments.
Different rules apply to other types of retirement accounts, such as 401(k)s. 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.
UBS recently published a very comprehensive note on this topic, and following a lot of on the ground research concludes that the market is extrapolating far too much impact on RMD based on current finding of weight loss treatments, i.e. RMD is oversold, but that could change if these treatments attract more subsidies.
If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA.