Making sense of RMDs

A required minimum distribution (RMD): what is it?

A required minimum distribution (RMD) is a set amount of money that the IRS mandates you take out of your tax-deferred retirement accounts annually beginning at age 73.

When is it necessary to take a minimum distribution?

Every year, on December 31st, you must take your RMD. You can wait until April 1st of the year after your 73rd birthday to withdraw your first RMD, and only your first.

For instance, you can take your first RMD by December 31 of this year or postpone it until April 1 of the next year if you turn 73 in June of this year. Delaying could result in a higher tax rate because you will be required to take your first and second RMDs in the same year.

If I continue to work, do I still need to take my RMD?

You have to take an RMD from your IRA if you keep working after the age of 73. RMDs from your current workplace savings plan, such as a small-business account, 403(b), or 401(k), may be postponed, though, if:

- You have an employer-sponsored retirement plan with the company you work for;

- You are still employed;

- You own no more than 5% of the company you work for.

If you meet all the above criteria, you can postpone drawing an RMD from that account until April 1 of the year following your retirement, unless your plan stipulates that RMDs start at age 73. IRAs and workplace plans with previous employers are exempt from this rule.

How can I use an IRA to determine my RMD?

Your retirement account amount as of December 31 of the prior year is typically divided by a life expectancy factor to calculate your RMD. The IRS Uniform Lifetime Table serves as the basis for your life expectancy factor.

You can utilize the IRS Joint Life and Last Survivor Expectancy Table if your spouse is your only beneficiary and they are younger than you by more than ten years.

An RMD Calculator can assist in estimating distribution needs annually, and it can perform the calculation for RMDs.

What alternatives do I have for using my RMD?

Before taking your RMD, it is essential to create a plan. Here are three things to think about:

Invest it: If you don't need the money for regular expenses, you can transfer the money you took out into a taxable brokerage account and use it to make investments in a way that suits your needs. Additionally, you can utilize the money to open a 529 college savings account.

Spend it: To help manage cash flow and retirement living requirements, think about using a budgeting method if you intend to use RMDs to pay for current expenses.

Gift it: By making a Qualified Charitable Distribution (QCD) direct donation from your IRA, you can support charitable causes. A QCD is not included in gross income and can be used to calculate your annual RMD when you become 70½. For the 2025 tax year, each individual may get up to $108,000 in QCD.

Which retirement account kinds need RMDs?

- RMDs from the following categories of tax-deferred retirement funds must be deducted after the age of 73:

- The majority of 401(k) and 403(b) plans;

- Traditional, rollover, SIMPLE, and SEP IRAs;

The majority of small-business accounts (self-employed 401(k), profit-sharing plan, money-purchase plan)

RMDs are not required for the original account owner of designated Roth accounts in workplace retirement plans as of 2024. Beneficiary requirements apply to beneficiaries of inherited Roth 403(b) or Roth 401(k) accounts.

If I inherit an IRA, do I still need to take an RMD?

Many of the IRS's RMD regulations still apply when you inherit an IRA. However, depending on your relationship to the original owner, other distribution rules could apply.

Can I take money out of one of my retirement accounts to cover my entire RMD?

Depending on the account type,

IRAs: You can withdraw the full amount from any combination of your IRAs, but RMDs must be determined independently for each IRA.

403(b)s: RMDs may be taken from any or all of the 403(b) accounts, but they must be computed independently.

401(k)s: RMDs need to be computed and deducted from each account separately.

Future RMD requirements are not diminished by a withdrawal in excess of the annual RMD minimum.

The original account holder's Roth IRA is exempt from RMD requirements and cannot be used to offset RMDs from other accounts.

What is the process for taking an RMD from a Fidelity IRA?

Through Fidelity's Retirement Distribution Center, you can see your estimated RMD amount and use their transfer procedure to withdraw the funds. There is also the option of automatic scheduling. For 403(b) and 401(k) plans, get in touch with the record keeper for your plan.

What taxes apply to RMDs?

RMDs may be subject to both federal and state taxes, as they are taxed like regular income. You will need to take two RMDs in that year, which could have an impact on your tax rate if you postpone your first RMD until April 1 of the year following your 73rd birthday.

Do you need assistance creating your RMD plan?

Your approach to retirement income can be greatly influenced by your understanding of RMDs. For assistance with retirement planning and RMD-related inquiries, contact the Retirement Group. For assistance, give us a call at (800) 900-5867.