What Are RMDs and Why Should You Plan for Them? Asset Strategy

Regarding retirement, there are rules and restrictions that may define many of your decisions. And with requirements constantly changing year to year, it becomes hard to keep track of what you’re supposed to do and when. Required Minimum Distributions (RMDs) can be an important part of your retirement-income plan, but it’s important to know that they come with some strict rules about the timing of when distributions are taken, and a formula based on your age for the amount you must take.  So, let’s shed a little light on RMDs and their recent changes.

Rules & Regulations: Stripped Down

An RMD is the amount of money you must withdraw from almost all tax-advantaged retirement accounts each year once you reach a certain age.[1]  In 2023, this age was bumped up to 73 years old.[2]  RMDs typically affect qualified accounts, such as 401(k)s, IRAs, and a slew of others. Many retirement accounts let your savings grow tax-free over the decades, deferring the payment of income taxes until you begin making withdrawals in retirement. By requiring you to start taking money out, the government receives the tax revenue it’s been waiting for and ensures taxpayers aren’t accumulating tax-free wealth indefinitely. It’s also important to note that RMDs are calculated and based on one’s life expectancy. [1]

Optimizing Your RMDs

So, why is it important to be prepared for RMDs? Well, if you are over the age of 73 and choose not to take your RMD, you will be penalized by the IRS. In fact, according to the new SECURE Act 2.0, the amount not withdrawn will be subject to a tax of 25%. [2] It’s no secret that this sanction is not ideal for your finances or your retirement plans. While an account holder must withdraw the RMD amount, they can also opt to withdraw more. However, if an individual chooses to do so, they should be prepared to pay the taxes they owe on the income they are generating. It’s also essential your annual RMD is withdrawn from the correct account no later than December 31st. [3] Account holders may withdraw their funds periodically throughout the year or wait until the year ends to receive maximum interest on their funds. [3]  Ultimately, this rule is in place to prevent individuals from avoiding paying the deferred tax liability owed on their retirement contributions.

While you can calculate what you owe on your own, a financial advisor can make this process relatively seamless. If you’d like to receive help with your RMDs or any other financial concerns, reach out to our team today for a complimentary review of your finances!


[1] https://www.forbes.com/advisor/retirement/required-minimum-distribution-rmd/
[2] https://www.investopedia.com/terms/r/requiredminimumdistribution.asp
[3] https://www.forbes.com/sites/bobcarlson/2021/06/29/8-strategies-for-optimizing-rmds-from-iras/?sh=7cb9262253d3

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This is for informational purposes only, does not represent legal or tax advice, does not indicate suitability for any particular investor, and does not constitute an offer to purchase or sell investments.

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