A required minimum distribution, or RMD, is the minimum amount required to be withdrawn from retirement accounts each year. These retirement accounts include traditional IRAs, simplified employee pension (SEP) IRAs, SIMPLE IRAs, and many employer sponsored retirement plans such as 401(k) and 403(b) plans.
The RMD is designed to ensure that you withdraw at least a portion of the funds in your account over your lifetime – and that you pay taxes on those funds. Failure to withdraw the required minimum will result in a potentially hefty penalty: The amount not withdrawn is taxed at 25% which is reduced to 10% if the RMD is taken within a correction window.
Income Tax Implications
RMDs are generally subject to federal income tax at ordinary rates and may also be subject to state tax. However, distributions that include after-tax contributions may not be taxable. Consult your tax advisor to determine your tax liability.
Know When to Take Your RMD
With the SECURE Act of 2019, anyone born on or after July 1, 1949, will have to start taking annual RMDs during the year they turn 72. SECURE 2.0 Act further increased the RMD start age to 73 for those born between 1951 and 1959. It also increased it to age 75 for those born in 1960 or later. Generally you must take your RMD by December 31 of the year it is due. However, for the first year you are required to take a distribution, the IRS permits you to take your first RMD by as late as April 1 of the next year.
The RMD requirement applies to all account owners of traditional IRAs, SEP IRAs, SIMPLE IRAs and employer sponsored plans. There is an exception for some individuals to delay taking RMDs from an employer plan if they are still working, known as the “still working exception.” To qualify, the employer plan must be from the employer with whom you are still employed, you cannot be a 5% owner of the business, and the plan document must allow for the still working exception. If you meet these criteria, you may delay taking your RMD from that employer plan until the year you retire. Again, the IRS permits you to delay taking that first RMD until April 1 following the year you retire.
Why RMDs Matter in Your Retirement Planning
RMDs aren’t just about meeting IRS rules—they play a key role in how you manage your income in retirement. The amount you withdraw can affect your tax bracket, your Medicare premiums, and even how long your retirement savings last. Planning ahead for RMDs allows you to:
- Align your withdrawals with your spending needs.
- Manage your tax liability more effectively.
- Ensure you avoid penalties for under-withdrawing.
- Coordinate RMDs with other retirement income sources for a smoother financial plan.
Understanding the timing, tax impact, and strategies around RMDs can make a significant difference in preserving your wealth throughout retirement.
Next Steps
If you’d like to see exactly how much you may need to withdraw each year, click below to view or download a helpful RMD chart from Raymond James.
For personalized guidance on how RMDs fit into your overall retirement strategy, reach out to a Lead Advisor at Voyager Wealth Advisors. We’re here to help you navigate your options and make confident decisions about your financial future.
