All about required minimum distributions (RMDs)

RMD stands for “required minimum distributions,” which is the amount of money you need to take out on an annual basis from a tax-qualified retirement account after you reach a certain age. IRAs and other retirement savings accounts are designed to help you save for retirement over the course of your career. Savings in retirement accounts will grow, tax-deferred, via interest and market performance, but you will eventually be obligated to start accessing (and paying taxes) on your tax-deferred savings.  

In 2020, the RMD rules changed from the age of 70½ to 72.

By the end of the year in which you reach that age, you’re required to begin withdrawing yearly RMDs from your tax-qualified retirement savings. Your RMD amount is reached by dividing your retirement account balance by your life expectancy factor, as stated in the IRS Uniform Lifetime Table. For example, the RMD tables state that if you’re 72 and have a retirement account balance of $450,000, the life expectancy table currently lists a distribution period of 25.6 years. Therefore, your RMD amount for the upcoming year would be $17,578—the minimum amount of money you must take out of your retirement account.

It’s good practice to check with the IRS for updates on required minimum distribution tables on at least an annual basis, as the details surrounding taxes, age, and value can change. 

If you’ve been able to save for retirement and put money away during your career years, it may benefit you to continue saving strategically after you reach retirement age.

Many people depend on their savings and use their RMDs to cover expenses and support their lifestyle after they finish working. But it’s also common for retirees to have other savings available and not depend solely on their designated retirement accounts. If this is the case, RMDs can be used in different ways. If you’re not relying on your qualified retirement savings to cover general expenses, you can reinvest your distributions in other savings vehicles. 

But you don’t have to wait until RMDs are required to redistribute some of your tax-qualified savings. You can purchase an annuity with some of your tax-qualified savings, which will give you lifetime income (in a manner similar to a traditional pension). You’ll owe taxes on the income, but you will not have to worry about RMDs on the money you have invested in the annuity. Additionally, if you’re concerned that you may need additional income in your later retirement years, you can use some of your tax-deferred savings to purchase a Qualified Longevity Annuity Contract (QLAC). RMDs are deferred on the money you invest in a QLAC, and payouts are not required until age 85. Your tax advisor can help you better understand the options you have.  

If you have children or younger loved ones, you can use RMD money to build your legacy and the estate that you plan to leave behind.

This can include contributions to a retirement fund for someone else, to purchasing a life insurance policy, or to an education savings plan for your grandchildren. New York Life and its family of companies have a variety of products that can be used in different ways to help maximize your RMDs. 

Your retirement can last for several decades, so it’s important to have a plan in place that will support your lifestyle and cover your expenses for the rest of your life. Retirement expenses can increase as you get older.