Understanding Required Minimum Distributions

What Are Required Minimum Distributions?

Required Minimum Distributions, or RMDs, are the minimum amounts you must withdraw each year from certain retirement accounts once you reach a specific age. These rules apply to traditional IRAs, 401(k) plans, 403(b) plans, and most other tax-deferred retirement accounts. Roth IRAs, notably, are not subject to RMDs during the original owner's lifetime.

The IRS requires these withdrawals because the money in these accounts has never been taxed. RMDs ensure that tax-deferred savings eventually get included in your taxable income rather than being passed along indefinitely. Understanding how RMDs work is an important part of retirement tax planning.

When Do RMDs Start?

Under the SECURE 2.0 Act, the age at which RMDs begin depends on when you were born:

• If you were born between 1951 and 1959, your RMDs begin at age 73.
• If you were born in 1960 or later, your RMDs begin at age 75.

Your first RMD must be taken by April 1 of the year after you reach the applicable age. After that first year, each subsequent RMD must be taken by December 31. If you delay your first distribution to the following April, keep in mind that you'll need to take two distributions that year, which could push you into a higher tax bracket.

If you're still working and participating in your employer's 401(k), you may be able to delay RMDs from that specific plan until you actually retire, provided you don't own more than 5% of the company. This exception does not apply to IRAs or former employer plans.

How Are RMDs Calculated?

Your RMD for each account is calculated by dividing the account's balance as of December 31 of the prior year by a life expectancy factor from the IRS Uniform Lifetime Table. If your spouse is more than 10 years younger than you and is your sole beneficiary, you use a different table that results in a smaller required distribution.

It's important to note that RMDs are calculated separately for each account you hold. If you have multiple traditional IRAs, you calculate the RMD for each one individually, though you can take the total amount from any one or combination of your IRAs. For 401(k) plans, however, you must take the RMD from each plan separately.

As you age, the life expectancy factor decreases, which means your RMD amount generally increases over time, even if your account balance stays relatively flat.

What Happens If You Miss an RMD?

Missing an RMD used to carry a steep 50% excise tax on the amount not withdrawn. The SECURE 2.0 Act reduced that penalty to 25%, and if you correct the shortfall within a timely correction window, the penalty drops further to 10%.

To correct a missed RMD, you'll need to withdraw the required amount as soon as possible and file IRS Form 5329 with your tax return. In many cases, if you act quickly and can show reasonable cause, the IRS may waive the penalty entirely. Still, it's far better to stay on top of your deadlines than to deal with the correction process after the fact.

Qualified Charitable Distributions

If you're charitably inclined, a Qualified Charitable Distribution (QCD) can be a powerful strategy. A QCD allows you to transfer up to $105,000 per year (as of 2024, indexed for inflation) directly from your IRA to a qualifying charity. The distribution counts toward satisfying your RMD for the year but is not included in your taxable income.

This is especially beneficial if you don't need the full RMD amount for living expenses. By using a QCD, you reduce your adjusted gross income, which can also lower your Medicare premiums and reduce the portion of your Social Security that's subject to federal tax. To qualify, the transfer must go directly from your IRA custodian to the charity. You cannot withdraw the funds first and then donate them.

QCDs are available to IRA owners who are age 70 and a half or older, regardless of when your RMDs actually begin. If charitable giving is part of your financial plan, this is a strategy worth discussing with your CPA.

How We Can Help

RMDs sit at the intersection of retirement planning, tax strategy, and investment management. Getting them right means more than just meeting a deadline. It means thinking about how your distributions fit into your broader financial picture, including your state tax situation in South Carolina, your other income sources, and your long-term goals.

At Bluffton Tax Pros, we help retirees coordinate their RMDs with the rest of their tax preparation and planning. Whether you have one IRA or several retirement accounts spread across different custodians, we can help you calculate the right amounts, plan the timing of your withdrawals, and explore strategies like QCDs to minimize your overall tax burden.