Understanding Required Minimum Distributions (RMDs): What You Need to Know
As you approach retirement, it’s essential to understand how Required Minimum Distributions (RMDs) will impact your financial plan. RMDs are designed to ensure that you withdraw a minimum amount from your tax-deferred retirement accounts, such as IRAs and 401(k)s, to avoid growing tax-deferred indefinitely.
When Do RMDs Start?
RMDs now start at age 73, thanks to the SECURE 2.0 Act. However, the age will increase again in 2033, rising to 75 for people who turn 74 after December 31, 2032.
How Are RMDs Calculated?
The RMD calculation process is straightforward. You simply divide your account balance from December 31 of the previous year by the life expectancy factor that corresponds with your age, which can be found on one of several IRS life expectancy tables.
Can I Reduce My RMDs?
While withdrawals from an IRA or 401(k) before age 73 do not count toward your RMDs, you can still reduce your RMDs by reducing your account balance. One strategy is to consider Roth conversions, which involve converting pre-tax assets into after-tax Roth assets. This requires paying income tax on the money now, but it can lead to tax-free growth in the future and reduce the size of your pre-tax account balance.
Important Considerations
When considering Roth conversions, be mindful of conversion taxes, as this will increase your tax liability for the year. Additionally, your conversion does not count toward last year’s RMD.
Planning for RMDs
RMDs are meant to draw down account balances and generate tax revenue for the IRS. While there’s not much you can do to avoid them, planning multiple years in advance can help. Consider working with a financial advisor to develop a strategy that suits your needs.
Additional Strategies
If you don’t need your RMDs to cover living expenses, consider having a plan for what you’ll do with that money once you withdraw and pay taxes on it. Charitably-minded individuals may want to explore qualified charitable distributions (QCDs) as well.
Get Professional Guidance
Retirement planning can be complex, but a financial advisor can help you navigate the process. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one is right for you.
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