Planning for retirement involves understanding a range of rules and requirements, including Required Minimum Distributions (RMDs). For those with retirement accounts, RMDs are a crucial part of managing taxable income and ensuring compliance with IRS regulations. Here’s what you need to know about RMDs, who they apply to, and how they are calculated. You can also watch our 3-minute animated video HERE.
Who Do RMDs Apply To?
RMDs apply to individuals who own certain types of retirement accounts and have reached the required age for taking distributions. Starting in 2023, the age threshold for RMDs increased to 73 and will increase to 75 in 2033. If you have a traditional IRA, SEP IRA, SIMPLE IRA, or a 401(k) or 403(b) (unless you’re still working for that employer), you are required to withdraw a minimum amount annually once you reach this age.
Importantly, Roth IRAs do not require RMDs during the account owner’s lifetime, though inherited Roth IRAs may have separate RMD requirements.
What Types of Accounts Are Affected?
RMDs are mandatory for most tax-deferred retirement accounts, including:
- Traditional IRAs
- SEP IRAs
- SIMPLE IRAs
- 401(k) and 403(b) accounts
Since contributions to these accounts are made pre-tax, the IRS requires account holders to begin withdrawing funds and paying taxes on those withdrawals once they hit the required age.
Roth IRAs are an exception for the original account holder, as these accounts are funded with post-tax dollars.
How Are RMDs Calculated?
RMDs are calculated based on the account balance at the end of the previous calendar year and the account owner’s life expectancy, as determined by the IRS Uniform Lifetime Table.1
To determine your RMD:
- Look up your age on the IRS Uniform Lifetime Table to find your life expectancy factor. You can refer to this easy to view online PDF from Fidelity
- Divide the prior year’s December 31 account balance by the life expectancy factor.
For example, if your account balance was $500,000 on December 31 of the previous year and your life expectancy factor is 25.6, your RMD for the year would be $19,531.25. Keep in mind that failing to take the full RMD can result in a steep penalty—currently 25% of the amount not withdrawn (reduced from 50% in 2023).
How QCDs Can Help Fulfill RMD Requirements
For individuals who don’t need the funds from their RMDs and want to reduce their tax burden, a Qualified Charitable Distribution (QCD) is a powerful strategy. A QCD allows individuals aged 70½ or older to donate up to $100,000 annually directly from their IRA to one or more qualified charities. This amount counts toward satisfying your RMD for the year, but it is excluded from your taxable income.
Using a QCD to meet your RMD requirement may have several benefits:
- Reduce your taxable income, which can help lower your overall tax burden.
- Help you avoid being pushed into a higher tax bracket or exceeding Medicare IRMAA thresholds.
- Allow you to give back to causes that are meaningful to you.
By understanding how RMDs work and incorporating strategies like QCDs, you can effectively manage your retirement accounts, minimize taxes, and support your financial and charitable goals. If you’d like to explore how RMDs and QCDs fit into your financial plan, we’re here to help.
Footnotes
The Uniform Lifetime Table is used by IRA owners to calculate RMDs unless their sole beneficiary for the entire year is their spouse, who is more than 10 years younger. In such cases, the Joint Life Expectancy Table is used, which may result in a smaller RMD due to the longer combined life expectancy of the account owner and their spouse. For beneficiaries who inherit an IRA and are not the spouse of the original account owner, the Single Life Expectancy Table is typically used to determine RMDs. See the IRS website on RMDs to learn more: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds.
Additional Resources
- Fidelity’s Uniform Lifetime Table PDF: https://www.fidelity.com/bin‑public/060_www_fidelity_com/documents/UniformLifetimeTable.pdf
- Read more about QCDs: https://www.twadvisor.com/articles/understanding-the-benefits-of-qcds-for-charitable-giving/.
- Watch our 3-minute animated video on RMDs & QCDs: https://vimeo.com/762373480.
Disclosures
TruWealth Advisors, LLC is an SEC registered investment adviser located in Louisiana. Registration does not imply a certain level of skill or training. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or financial advice. You should consult your own tax, legal and financial professionals before engaging in any transaction. Past performance does not guarantee future results. Additional information about TruWealth Advisors, including our registration status, fees, and services is available on the SEC’s website at https://adviserinfo.sec.gov/firm/summary/306876.