The amount of tax you owe will depend on your total income for the year, including the RMD. It's important to include your RMDs in your income tax planning to understand the tax implications fully.
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All about required minimum distributions (RMDs)
RMD stands for “required minimum distributions,” which is the amount of money you need to withdraw 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 2023, the RMD rules changed to age 73
Previously, you were required to start taking RMDs from your retirement accounts (such as traditional IRAs, SEP IRAs, SIMPLE IRAs, and workplace retirement plans) when you reached 72. However, starting in 2023, the SECURE 2.0 Act raised the age for initiating RMDs to 73. This means you would begin taking RMDs from your tax-qualified retirement savings by April 1 of the year following the year you turn 73. This requirement ensures that the savings, which have benefited from tax-deferred growth, are eventually drawn down and taxed, providing you with retirement income.
Additionally, this adjustment aims to reflect longer life expectancies and allows more time for retirement savings to grow. Your RMD amount is determined by dividing your retirement account balance as of December 31 of the previous year by a distribution period from the IRS Uniform Lifetime Table.
To calculate your RMD, consult the IRS Uniform Lifetime Table. This step is essential to determine the precise amount you need to withdraw each year, ensuring compliance with IRS rules and efficient use of your retirement savings. Additionally, IRA custodians, the financial institution that holds your account's investments, are required to report the RMD amount to you each year.
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. RMDs are not only a tax obligation but also an opportunity to strategically plan your retirement income. Whether reinvesting, saving, or spending, how you use your RMDs can significantly impact your financial security and lifestyle in retirement.
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 used to purchase the annuity. The SECURE 2.0 Act includes several provisions that can help reduce the amount of RMDs you need to withdraw from IRA accounts by using annuity payments.
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 Qualifying 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, purchasing a life insurance policy, or an education savings plan for your grandchildren. Planning how to use your RMDs can be a meaningful part of your overall financial strategy, offering ways to support your family and leave a lasting legacy. 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.
Frequently asked questions:
Whether it's better to take RMDs monthly or annually depends on your personal financial needs and tax situation. Monthly withdrawals can help simulate a regular paycheck, providing consistent income throughout the year. Annual withdrawals may be beneficial if you wish to maximize the time your money is invested and potentially earn more returns. However, it's essential to ensure that you withdraw your full RMD amount by the deadline to avoid penalties.
RMDs must start by April 1 of the year following the year you turn 73 (75 if you were born on or after January 1, 1960). There is no specified age at which RMDs stop. As long as you have balances in your retirement accounts, you must continue to take RMDs each year.
Connect with a financial professional.
Connect with a New York Life financial professional today to learn more about how to get the most out of your retirement savings and better understand your RMD options.
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This article is provided for general informational purposes only. Neither New York Life Insurance Company nor its agents provide tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.