One of the most important topics in retirement planning is Required Minimum Distributions (RMDs). If you’ve been saving in tax-deferred accounts, the IRS requires you to eventually begin taking withdrawals. Knowing when and how these apply is key to avoiding unnecessary penalties and coordinating your income in retirement.
What is an RMD?
A Required Minimum Distribution (RMD) is the minimum amount you must withdraw from certain retirement accounts each year once you reach the applicable age. These rules ensure that tax-deferred savings are eventually subject to income tax.
Which Accounts Require RMDs?
RMDs apply to most tax-deferred retirement accounts, including:
- Traditional IRAs
- SEP IRAs and SIMPLE IRAs
- 401(k), 403(b), and 457(b) plans
- Rollover IRAs
Important note: Roth IRAs are not subject to RMDs during the original owners lifetime. However, ROTH 401(k)s are unless rolled into a Roth IRA.
When Do You Need to Start Taking Them?
Recent updates to the law (SECURE Act 2.0) changed the starting age:
- If you were born between 1951 and 1959, RMDs begin at age 73.
- If you were born in 1960 or later, they begin at age 75.
Your first RMD must be taken by April 1 of the year following the year you reach the starting age, and by December 31 each year thereafter.
How Are RMDs Calculated?
RMDs are based on two factors:
- Your account balance as of December 31 of the prior year.
- The IRS life expectancy factor that applies to you.
For example, if your IRA balance was $500,000 and the IRS factor was 25.6, the required withdrawal would be roughly $19,500.
Failing to take an RMD may result in IRS penalties, currently up to 25% of the amount not withdrawn (reduced to 10% if corrected promptly).
The Value of Professional Guidance
Although the formula seems straightforward, planning RMDs within the bigger picture of your retirement income strategy can be complex. Working with a fiduciary advisor can help you:
- Stay in compliance with IRS requirements.
- Integrate withdrawals into your broader income and investment plan.
- Consider tax implications in coordination with your CPA or tax professional.
- Make decisions that align with your long-term financial goals.
At Western Financial Corporation, an SEC-registered investment adviser, we help clients navigate these rules and manage their wealth with a disciplined, fiduciary approach.
Take the Next Step
If you’re approaching RMD age or simply want clarity on how RMDs fit into your retirement income strategy we welcome a conversation.
Schedule a Complimentary Consultation with Western Financial today.