Strategies for Taking RMDs
Contributions to traditional (non-Roth) tax-deferred retirement accounts such as IRAs and employer plans are tax deductible (up to the annual limit) if they are made directly, or they are made with pre-tax dollars, typically through a payroll deduction.
Unfortunately, you cannot defer taxes indefinitely on the money you’ve accumulated in these accounts. You must take required minimum distributions (RMDs) each year once you reach age 73 if you were born from 1951 to 1959, or age 75 if you were born in 1960 or later. If you are still employed, you may be able to delay taking RMDs from your current employer’s plan until after you retire.
One-time option
Even though you must take an RMD for the tax year in which you turn 73 (or 75), you have a one-time option to wait until April 1 of the following year to take your first distribution. For example, if you turn 73 in 2027, you must take an RMD for 2027 no later than April 1, 2028. You must then take your 2028 distribution by December 31, 2028. While it may be helpful in some cases to wait until the following year to take your first RMD, taking two RMDs in one year could put you in a higher tax bracket.
How much to take
Annual RMDs are based on the account balances of your traditional IRAs and employer plans as of December 31 of the previous year, your age in the current tax year, and your life expectancy as defined in IRS tables. Most people use the IRS Uniform Lifetime Table (Table III). If your spouse is more than 10 years younger and the sole beneficiary of your IRA, you must use the Joint Life and Last Survivor Expectancy Table (Table II).
To calculate your RMD, divide the value of each retirement account balance as of December 31 of the previous year by the distribution period in the IRS table (see example).
If you have multiple tax-deferred accounts, calculating RMDs can be complex — one reason that it might be helpful to consolidate your retirement accounts. The IRA custodian or administrator of your retirement plan may provide information regarding your RMD for a specific account, but you might also consult with your tax professional.
Calculating RMDs
This example assumes a $500,000 traditional IRA or employer plan balance each year. Note that as the divisor decreases at later ages, the RMD increases, assuming the account balance remains the same. In practice, the account balance may decline over time.
| Age | Divisor from |
RMD | |
| 73 | 26.5 | $500,000 / 26.5 = $18,868 |
|
| 75 | 24.6 | $500,000 / 24.6 = $20,325 |
|
| 80 | 20.2 | $500,000 / 20.2 = $24,752 |
|
| 85 | 16.0 | $500,000 / 16.0 = $31,250 |
|
| 90 | 12.2 | $500,000 / 12.2 = $40,984 |
When should you take your RMD?
Many people take a lump sum at the end of the year to give the funds more time to pursue potential growth, but this approach also comes with a higher risk of a market downturn if the funds are invested in securities that change in value with the markets.
A recent study found that taking equal monthly distributions of 1/12 of your RMD, regardless of market activity, can provide similar returns with less risk over a 10-year withdrawal period. For example, if your RMD is $24,000, you could take $2,000 each month and either reinvest it or use it for living expenses. The study also found that a hybrid approach where half the RMD was taken in monthly installments and half taken at the end of the year offered a good balance of risk and return.1
Another strategy would be to plan ahead and keep enough funds for one to three years of RMDs in cash alternatives that can be easily liquidated or CDs or bonds that mature at the times you want to take your distributions. This could help prevent the need to sell more volatile securities during a down market.
Steep penalties
The penalty for not taking an RMD is 25% of the amount that should have been withdrawn. The penalty is reduced to 10% if “timely corrected” by making up the missed RMD, generally within two years unless the penalty is assessed earlier.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. The principal value of cash alternatives may be subject to market fluctuations, liquidity issues, and credit risk. It is possible to lose money with this type of investment. The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost.
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