What retirees should know about Required Minimum Distributions (RMDs)

If you have spent decades saving in retirement accounts, there is one rule that eventually applies to nearly everyone. At some point, the government requires you to start taking money out. These withdrawals are called required minimum distributions, often shortened to RMDs.

Understanding required minimum distributions is essential because they can have a major impact on your retirement income and your taxes. Many retirees are surprised by how large their required withdrawals can become and how they affect their tax situation later in retirement.

The good news is that with the right planning, required minimum distributions can be managed strategically rather than becoming an unpleasant surprise.

Here is what retirees should know about required minimum distributions and how they can fit into a smart retirement income plan.

When do required minimum distributions start?

One of the most common questions retirees ask is when they are required to begin taking distributions from their retirement accounts.

For most retirees, required minimum distributions begin at age 73. This rule currently applies to most tax deferred retirement accounts, including:

• Traditional IRAs
• 401(k) plans
• 403(b) plans
• SEP IRAs
• SIMPLE IRAs

Your first required minimum distribution must be taken by April 1 of the year after you turn 73.

After that first year, every future RMD must be taken by December 31 each year.

While delaying your first withdrawal until April might seem appealing, there is an important detail to understand. If you delay the first RMD until April, you will still need to take the second one by December of that same year. That means two taxable withdrawals in a single year.

For many retirees, that can push them into a higher tax bracket.

This is why planning ahead with a retirement income strategy can make a meaningful difference. At Guerra Wealth Advisors, we regularly help retirees evaluate the timing of their required minimum distributions so they can make informed decisions that align with their broader retirement goals.

How required minimum distributions are calculated

Your required minimum distribution is calculated using three main factors:

• Your retirement account balance at the end of the previous year
• Your age
• The IRS life expectancy table

The IRS publishes a Uniform Lifetime Table that determines the percentage of your retirement account that must be withdrawn each year.

Here is a simplified example.

Imagine a retiree has:

• $800,000 in a traditional IRA at the end of the previous year
• Age 73

Based on the IRS life expectancy factor for that age, the required withdrawal percentage would be roughly 3.8 percent.

That would produce an RMD of approximately $30,400 for the year.

Each year, the percentage increases slightly as you age, which means the required withdrawals typically grow over time.

Which accounts are subject to RMDs

Not every retirement account requires minimum distributions.

Accounts that generally require RMDs include:

• Traditional IRAs
• 401(k) plans
• 403(b) plans
• Other tax deferred retirement plans

However, there are also some key exceptions.

Roth IRAs

Roth IRAs do not require minimum distributions during the original owner’s lifetime.

This is one reason Roth accounts are often considered a powerful planning tool for retirees who want more flexibility with their retirement income and taxes.

Still working exception

If you are still working past age 73 and participating in a current employer’s 401(k) plan, you may be able to delay RMDs from that specific account. This exception usually does not apply to IRAs or to retirement plans from previous employers.

Because these rules can vary depending on your situation, it is important to review your accounts carefully as you approach retirement.

The tax impact of required minimum distributions

One of the biggest reasons retirees should pay attention to required minimum distributions is taxes.

RMDs from traditional retirement accounts are generally treated as ordinary income.

This means your required withdrawals could potentially:

• Increase your taxable income
• Push you into a higher tax bracket
• Increase taxation of Social Security benefits
• Raise Medicare premium costs

Many retirees assume their taxes will automatically decrease in retirement, but required minimum distributions can sometimes have the opposite effect.

This is why tax planning often becomes more important after retirement rather than less important.

Working with a wealth advisor can help you look ahead and determine how required minimum distributions may affect your overall financial picture. At Guerra Wealth Advisors, we help retirees evaluate different strategies that may help reduce unnecessary tax burdens over time.

The penalty for missing an RMD

Required minimum distributions are not optional.

If you fail to withdraw the required amount, the IRS imposes a penalty on the shortfall.

Currently, the penalty is 25 percent of the amount that should have been withdrawn. If corrected quickly, the penalty may be reduced to 10 percent.

For example, if your RMD was $20,000 but you only withdrew $10,000, the penalty could apply to the remaining $10,000.

Because these penalties can be significant, many retirees set up automatic withdrawals or coordinate distributions through their financial advisor to ensure the required amount is taken each year.

Strategies to manage required minimum distributions

Required minimum distributions cannot be avoided entirely for most retirees, but they can often be managed more efficiently with thoughtful planning.

Here are several strategies retirees frequently consider.

Roth conversions earlier in retirement

One approach some retirees explore is converting portions of traditional retirement accounts into Roth accounts earlier in retirement before RMDs begin.

While Roth conversions may create taxes in the year of conversion, they can sometimes reduce the size of future required minimum distributions.

Strategic withdrawals before age 73

Another strategy is taking voluntary withdrawals earlier in retirement.

By gradually drawing down tax deferred accounts before required minimum distributions begin, some retirees may be able to smooth out their tax exposure over time.

Qualified charitable distributions

For retirees who give to charity, qualified charitable distributions can be a powerful strategy.

These allow you to transfer money directly from your IRA to a qualified charity. The distribution counts toward your RMD but is not included in your taxable income.

This approach allows retirees to support causes they care about while potentially reducing their tax burden.

Because each strategy has different tax implications, it is important to evaluate them within the context of a comprehensive retirement plan.

Why required minimum distributions deserve proactive planning

Required minimum distributions may seem like a simple rule, but they can have a long lasting effect on your retirement finances.

Without careful planning, retirees may find themselves facing:

• Larger tax bills
• Unexpected Medicare surcharges
• Reduced control over retirement income

With the right strategy, however, RMDs can be incorporated into a well structured retirement income plan that balances income needs, taxes, and long term financial goals.

This is one of the areas where professional guidance can be particularly valuable. At Guerra Wealth Advisors, we help retirees review their retirement accounts, evaluate upcoming required minimum distributions, and design strategies that support long term financial confidence.

Retirement planning does not stop once you leave the workforce. In many ways, the decisions you make after retirement become even more important.

If you would like help understanding what retirees should know about required minimum distributions and how they fit into your personal retirement strategy, scheduling a conversation with our team can be a great next step.