Clay Budach, CFP®

Clay is a Wealth Management Advisor for Custom Wealth Planners. Clay enjoys writing on topics of retirement planning, taxes, and industry related news. Learn more about Clay here.


Navigating the complexities of retirement planning often involves grappling with various financial considerations, among which required minimum distributions (RMDs) play a significant role. Understanding RMDs, their implications, and potential strategies to manage them can empower retirees to make informed decisions about their financial future. In this blog, we explore the intricacies of RMDs, reviewing applicable retirement accounts, tax implications, and strategic approaches to mitigate their impact.

Understanding RMDs:

Investing in pre-tax accounts like traditional IRAs or 401(k)s can serve as an effective strategy for retirement planning. Contributions to these accounts offer the advantage of immediate tax deductions, along with tax-deferred growth on contributions and earnings over time. However, it’s essential to acknowledge that these accounts are subject to mandatory distributions enforced by the IRS. Despite this requirement, pre-tax accounts remain a valuable savings tool, particularly for individuals with higher incomes now who will be in a lower tax bracket in retirement.

Your obligation to handle RMDs during retirement hinges on your birthdate and the presence of pre-tax balances in your retirement accounts. Upon reaching their 70s (specifically between ages 70.5 and 75, depending on birthdate), retirees must initiate withdrawals from these pre-tax balances to comply with RMD regulations. It’s crucial for retirees to calculate the annual withdrawal amount necessary to fulfill the RMD rule and fulfill their tax obligations. The SECURE ACT 1.0 & 2.0 have adjusted the commencement ages for RMDs as follows:

Age 72 for individuals born in 1950 or earlier (or 70½ if they turned 70½ before 2020).

Age 73 for those born between 1951 and 1959.

Age 75 for individuals born in 1960 or later.

Calculating RMDs:

Calculating your Required Minimum Distributions involves several steps:

Determine Account Balance: Start by dividing your year-end account balance from the previous year by the IRS life expectancy factor based on your age at the beginning of the current year. Remember, this calculation only considers the total amounts in your retirement savings accounts as of December 31 of the prior year, excluding any balances in Roth IRAs.

Account for Multiple IRAs: If you have multiple IRAs, calculate the RMD for each account separately. However, you have the flexibility to withdraw the total RMD amount from any one IRA or any combination of IRAs. For instance, if one IRA’s balance is insufficient to cover the full RMD, you can withdraw the remaining amount from another IRA with a larger balance.

Consider 401(k) Accounts: Retirees who own 401(k) accounts and have reached RMD age must also calculate and take RMDs from those accounts. Unlike IRAs, each 401(k) account requires its own RMD calculation and withdrawal.

Choose Withdrawal Method: You can withdraw your annual RMD in a lump sum or in installments, such as monthly or quarterly payments. While delaying the RMD until year-end allows your funds more time to grow tax-deferred, ensure that the total RMD amount is withdrawn by the deadline to avoid penalties.

Additionally, there are several life expectancy tables provided by the IRS. Select the appropriate table based on your situation, such as single life expectancy, surviving spouse, joint life and last survivor expectancy, or uniform lifetime. If you don’t fall into one of these categories, consult the relevant table specified by the IRS guidelines, such as Table I for account beneficiaries and Table II for owners with spouses over 10 years younger who are the sole beneficiaries of the IRA.

Finally, if you inherit a traditional IRA and the original owner had already started taking RMDs at the time of death, you must continue to receive the distributions as previously calculated during the year of the original owner’s death. Afterwards, the amount of your RMD will depend on your status as a beneficiary, such as a surviving spouse or minor child.

Applicable Retirement Accounts:

RMDs apply to a variety of qualified plans, including but not limited to:

  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Traditional IRAs
  • SEP IRAs
  • Profit-sharing plans
  • Other defined contribution plans

Required Minimum Distributions are applicable to both the original account owner and any beneficiaries who may inherit these types of accounts. It’s essential to note that RMD rules also extend to inherited Roth IRAs, despite not being applicable to the original account owner.

Tax Implications and Penalties:

Required minimum distributions are subject to taxation as ordinary income, with a maximum tax rate of 37%. If retirees haven’t been taking distributions previously or if the RMD requirement exceeds their needed distribution, it could propel them into higher marginal tax brackets. Consequently, more of their Social Security benefits might become taxable, and they could become subject to IRMAA taxes for Medicare parts B and D.

Failure to withdraw the full RMD amount by the deadline incurs penalties. Initially set at a hefty 50%, the excise tax rate for missed RMDs has been adjusted under the SECURE 2.0 Act. The revised rate stands at 25%, with a potential reduction to 10% if the RMD is rectified promptly within two years.

Strategies to Lessen the Impact of RMDs and Taxes:

1. Roth Conversions:

One powerful strategy to mitigate the impact of RMDs and their associated taxes is through Roth conversions. By converting funds from traditional IRAs or other pre-tax retirement accounts into Roth IRAs, retirees can effectively reduce future RMDs and the corresponding tax liability. Importantly, Roth IRAs are not subject to RMDs for the original account owner.

  • Tax Implications: It’s essential to note that Roth conversions are taxable events, meaning individuals will owe taxes on the converted amount in the year of the conversion. However, by paying taxes upfront, retirees can enjoy tax-free withdrawals from the Roth IRA in retirement, including any growth on the converted funds.
  • Strategic Approach: Retirees may consider strategically timing Roth conversions during years when they find themselves in lower tax brackets, potentially minimizing the tax impact of the conversion. Additionally, spreading out conversions over multiple years can help manage tax liabilities and prevent pushing into higher tax brackets.

2. Qualified Charitable Distributions (QCDs):

Another effective strategy to alleviate the burden of RMDs and associated taxes is through Qualified Charitable Distributions (QCDs). QCDs allow retirees aged 70½ or older to donate up to $100,000 annually directly from their IRA to qualified charities without counting the distribution as taxable income.

  • Tax Advantages: QCDs offer several tax advantages, including lowering the retiree’s adjusted gross income (AGI) and potentially reducing the impact of taxes on Social Security benefits and Medicare premiums. Furthermore, because the distribution is not included in the retiree’s taxable income, it may help individuals avoid reaching higher tax brackets and leave more room to convert funds to a Roth IRA. 
  • Eligibility and Considerations: To qualify for QCDs, retirees must be at least 70.5 years old at the time of the distribution. They must also meet certain eligibility criteria, including age requirements and donation limits. It’s crucial to ensure that donations are made directly from the IRA custodian to the qualified charity to qualify for QCD treatment.

Using your RMD

Pay Your Taxes:

Simplify your tax payments by utilizing your RMD strategically. You can instruct your IRA custodian to withhold sufficient funds from your RMD to cover your entire tax liability for the year across all income sources. This approach eliminates the need for quarterly estimated tax payments and helps prevent underpayment penalties.

Withholding taxes from your RMD is advantageous because the IRS considers withholding to be evenly distributed throughout the year. Even if you choose to take your RMD later in the year, such as in December, this strategy remains effective. Waiting allows you to have a clearer understanding of your actual tax obligation, enabling you to adjust the withholding amount accordingly to cover your tax bill accurately.

Reinvest Your RMD:

If you find yourself unable to reduce or avoid your RMD, it’s essential to look for ways to make the most of that required distribution. While some retirees may choose to incorporate the RMD into their cash flow as an income source, others may have their expenses covered by other sources, such as Social Security benefits and pension payouts. For those in the latter scenario, there are strategic options for reinvesting RMDs to maximize their financial impact.

While you can’t reinvest the RMD directly into a tax-advantaged retirement account, there are alternative investment avenues to consider. One option is to stash the RMD in a taxable brokerage account. By doing so, you can continue to grow your investment portfolio and potentially generate additional income over time.


Retirement accounts like 401(k)s and traditional IRAs offer invaluable benefits for individuals planning for their future. However, as retirement age approaches, it’s crucial to understand the rules and implications surrounding required minimum distributions (RMDs). By comprehending the intricacies of RMDs, retirees can effectively navigate their financial landscape, potentially reducing tax burdens and optimizing their retirement income streams.


The information provided in this blog is for educational purposes only and should not be construed as tax or financial advice. All individuals are encouraged to consult with a qualified tax or financial professional before making any decisions related to their retirement planning or investment strategies.

How to do RMDs fit into the broader financial plan?

Welcome to Custom Wealth Planning’s blog where founders Travis & Clay share their thoughts on topics that cover Financial Planning, Taxes, and Retirement Planning. 

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