Required Minimum Distributions (RMDs)

Why you don't need to fear đź‘» them.

3 RMD Tips You Wish Someone Would Have Told You Sooner (Bonus RMD spreadsheet inside!)
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First the basics.

What are RMDs?

RMDs are minimum amounts that a retirement plan account owner must withdraw annually starting with the year they reach 72 (70 ½ if you reach 70 ½ before Jan 1, 2020), if later, the year in which you retire.
In regular terms, when you reach the qualified age, every year the IRS will make you withdrawal from your tax-deferred retirement accounts (eg: traditional IRA, traditional 401k, 403b, SEP IRA).
Why do they make me do this?

When you put money in a traditional retirement account, you are putting it in pre-tax. Meaning you are deferring paying taxes today but willing to pay later.

Once you reach 72, the IRS wants to start collecting some of that tax money.
How much do you need to withdraw?

That is going to depend how large your traditional retirement accounts are as there are formulas that do the calculation that use age & life expectancy factor to determine the amount.
Why should you care?

The reason you should care is because withdrawals from tax-deferred retirement accounts are taxed as income. If your RMD is high, you may be forced into a higher tax bracket and pay more in taxes.
What will the tax brackets be when you retire?

No one knows and if anyone says it will be higher (or lower) that is just speculation.

If the answer to this was certain choosing between Traditional vs Roth would be simplistic.
If you have tax-deferred retirement accounts, how can you limit your RMD burden?
Tip #1: Withdrawal Management

Once you reach 59.5, you can start withdrawing funds from your tax-deferred retirement accounts w/o penalty.

By planning you can limit the RMD burden by withdrawing the max amount of đź’° starting @ 59.5 that keeps you at a desired tax bracket.
Over time, the withdrawals will shrink the size of your tax-deferred accounts, resulting in lower RMDs when you reach 72.
Tip #2: Roth Conversion Ladder

Basically what this means is you convert tax-deferred retirement account to a Traditional IRA. Then convert some or all to a Roth IRA.

2 things:

1. The conversion is taxed as income

2. Must wait 5 years to withdraw monies even after 59.5
Why do this?

Basically you can pick and choose years that you may have lower income to convert traditional to Roth money since Roth IRA has no RMD restrictions.

Why not just use a Roth to begin with?

Because you are forced to pay tax on your highest tax bracket for that year.
Doing the Roth conversion ladders, you get to essentially pick and choose when it’s most optimal for you.
Tip # 3: Give to charity

The beauty of giving to charity is not only can you find causes you support and believe in but you can donate via Qualified Charitable Distributions (QCD) to satisfy RMDs.

The best part? QCDs aren’t taxed and won’t count as taxable income.
Keep in mind that RMD age requirements and restrictions can change. For example it recently moved from 70.5 to 72 years old.

Also when you start taking out RMDs even in those peak years, there will likely be exemptions and deductions to further reduce your tax burden.
Just as compounding works when you’re building wealth, withdrawing at a specific pace can ease the RMD burden once those withdrawals are required.

To add, RMD money needs to be withdrawn, not necessarily spent. You can always keep investing it in a taxable account, if desired.
What would be the RMD impact for my portfolio based on annual growth and inflation rate?

Here is a spreadsheet I put together that does exactly that (for educational purposes only). Fill out cells A2, B2, C2 and you can see the impact based on today’s laws.

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