10 Lesser-Known Facts About Required Minimum Distributions (RMDs)
Most retirees know that, once they turn 73 (if born after 1950), they are required by law to take required minimum distributions (RMDs) from their retirement accounts.
But in financial planning, nothing is ever quite that simple.
In the past several years, the rules around RMDs have changed in very significant ways. Those changes, other rules around how and when RMDs occur, and changes to the very nature of retirement create complex planning scenarios that affect all retirees in very different ways.
To maximize your nest egg, make sure you discuss these lesser-known facts about RMDs with your financial advisor:
1. Inherited IRAs have unique RMD rules.
Beneficiaries used to be able to take RMDs based on their ages and the IRS's life expectancy tables. The 2019 SECURE Act eliminated these "stretch" distributions. Now, folks who inherit an IRA typically have to take annual distributions that exhaust the account within 10 years. Surviving spouses have a few additional options, including taking lump sum distributions or treating the inherited IRA as their own and taking RMDs starting at age 73.
2. RMDs apply to multiple account types.
Much of the discussion around RMDs typically centers on 401(k)s and IRAs, the most common types of retirement accounts. But tax-deferred accounts like 403(b)s, 457 plans, SEP IRAs, and SIMPLE IRAs all have their own distinct RMD rules that you and your advisor should plan around.
3. You can't roll over RMDs.
Once you take an RMD, you cannot reinvest it into another retirement account, like a Roth IRA. You could, however, put that RMD into a savings account, invest the money in a brokerage account, or use it to buy another type of investment, like real estate.
4. The RMD age has changed -- and could change again.
In 2022, the SECURE ACT 2.0 raised the RMD age from 72 to 73. Folks born in or after 1960 have to start taking their RMDs when they turn 75. As seniors continue to live and work longer, it's very possible that our government will continue to incentivize the able-bodied to keep working and saving and push back RMD ages even further.
5. You can take action to avoid RMD penalties.
If you neglect to take an RMD in a given year, the IRS will hit you with one of the steepest penalties in the tax book: 50% of what your RMD should have been. But if you realize you've made this mistake and act fast, you can file form 5329, explain your mistake citing "reasonable cause," and request a penalty waiver.
6. RMDs for the year ahead are based on the previous year's account balances.
The amount of your RMD for a given year is locked in by your account balances on December 31st of the previous year. How those balances fluctuate going forward typically does not affect your RMD for that year.
7. You can take your total RMD from one account.
If you have multiple retirement accounts of the same type from which you need to take RMDs, you can add up your total RMD and take that amount from just one account. However, it’s important to be aware that you cannot satisfy an IRA RMD from a 401k or 403B or vice versa.
8. Qualified Charitable Distributions (QCDs) can satisfy RMDs.
Speaking of tax liability in retirement, QCDs can be a very important consideration for retirees who have significant giving goals. Once you reach age 70 1/2, the IRS allows you to transfer up to $105,000 to a qualified charity every year, tax free. A QCD does not count as taxable income, but it does count as an RMD. So, in a given year, if you don't need your RMD to pay your bills or meet another retirement goal, a QCD can help you fulfill your RMD requirements, lower your taxable income, and help out those in need all at once.
9. Roth IRAs do not require RMDs.
The Roth IRA can be an incredibly advantageous retirement planning tool. Not only do your contributions grow tax free, but the withdrawals you make don't count as taxable income either. Plus, the original owner of the Roth IRA doesn't have to take RMDs during their lifetime. Inheritors, however, do have to satisfy RMD requirements, typically following that 10-year liquidation timeline of other inherited retirement accounts.
10. RMDs can affect Medicare premiums.
The monthly Medicare premiums that the Social Security Administration establishes every fall are, in effect, minimums. If your annual taxable income in retirement is above certain amounts, then you will be charged an Income-Related Monthly Adjustment Amount (IRMAA) on top of your premium. Taxable RMDs do count towards determining if you have to pay this Medicare surcharge. We will discuss the 2025 premium amounts and IRMAA thresholds on our podcast Keen on Retirement when they are announced later this fall.
I believe it’s important that retirees understand some of the key issues around their retirement planning. But I hope this RMD crash course also illustrates how important it is that you work with a professional who understands these rules, how they could change, and how they can affect your comprehensive financial planning. Let Keen Wealth handle your compliance with the IRS so that you can focus on enjoying your retirement.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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