Video! Optimizing Your RMDs

December 09, 2021

So, you’re about to turn 72 years old.... Happy birthday! 

The number is an important milestone, as it marks the time when required minimum distributions – or RMDs – begin to be withdrawn annually from individual retirement accounts and employer-sponsored retirement plans. There are tax consequences associated with RMDs, and I’m going to share with you a few tips that can help you optimize the impact on your bottom line.

For IRAs, you must begin withdrawing from a traditional IRA by April 1 following the year in which you turn 72. The only exception is if you’re married and your spouse is more than 10 years younger than you. In that case, the RMD amount is based on your joint life expectancy.

One more note: Roth IRAs do not require an RMD.

Remember, your RMD is taxed as ordinary income. Here are three options on how to take your RMDs:

1) Recognize The Income

2) Reinvest Into Another Account

3) Donate To A Charity

For employer retirement plans — 401(k)s, for instance -- the same timeline applies: You must begin withdrawing from the plan by April 1 following the year in which you turn 72. Another note: If you’re still working past 72 and you own 5% or less of a company, you may be able to delay RMDs until you retire. It’s possible that you could receive a lump-sum distribution from a 401(k), profit-sharing, and stock purchase plan if you complete it in a one-year period. If so, you’ll be taxed at the rate for single taxpayers. Also, if you were born before 1937, you qualify for a 10-year forward income averaging. To calculate your RMD, take the total balance as of December 31 divided by your life expectancy. That’s the distribution amount. There’s a bit of leeway here that may provide you with more favorable tax treatment: You can either take your initial RMD in the year when you turn 72 or up until April 1 of the following year. If you delay your RMD until the following year, you must take two RMDs that year which may increase your tax consequences. 

*This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax  advisor.