For decades, you’ve done exactly what financial professionals tell you to do. You contributed to your 401(k), Thrift Savings Plan (TSP), or Traditional IRA. You received tax deductions along the way, watched your investments grow tax-deferred, and built a retirement nest egg that hopefully gives you financial confidence.
Then, one day, the IRS comes knocking.
Not because you’ve done anything wrong—but because the government would like its share.
That’s the basic idea behind Required Minimum Distributions, commonly referred to as RMDs. While they aren’t particularly complicated, they often catch retirees by surprise because they represent a shift in mindset. During your working years, the goal is to put money into retirement accounts. Eventually, the government requires you to start taking money back out.
Why Do Required Minimum Distributions Exist?
Traditional retirement accounts were never intended to be permanent tax shelters. When you contribute to a Traditional TSP, Traditional 401(k), or Traditional IRA, you generally receive a tax deduction upfront. Your investments grow tax-deferred for years, sometimes decades, without generating annual taxable income. Eventually, however, the IRS expects to collect the taxes that were postponed.
Required Minimum Distributions are simply the government’s way of ensuring retirement accounts don’t continue growing tax-deferred forever. Think of it as deferred taxes finally coming due—not a penalty, but the final chapter of the agreement you made when you accepted those tax deductions years ago.
When Do RMDs Begin?
Current law generally requires most retirees to begin taking Required Minimum Distributions during the year they turn age 75. (If your birth year is between 1951-1959, it’s actually 73, but we’ll assume you’re at least a late-stage Boomer, Gen-X’er or later…) If Congress changes the rules in the future, that age could change again, but for today’s retirees, age 75 is the key milestone.
Your first RMD can be delayed until April 1 of the following year. While that sounds appealing, delaying isn’t always the best strategy because you’ll also need to take your second RMD before December 31 of that same year. That means two taxable distributions could occur in one calendar year, potentially increasing your tax bill.
For many retirees, taking the first distribution during the year they turn 75 results in a smoother tax picture.
How Are RMDs Calculated?
Many people assume there’s a complicated formula.
Fortunately, it’s much simpler.
Each year, the IRS publishes life expectancy tables. Your retirement account balance as of December 31 of the previous year is divided by your life expectancy factor to determine the minimum amount that must be withdrawn.
For example, suppose you have $1,000,000 in a Traditional IRA on December 31. If your IRS life expectancy factor is approximately 26.5, your Required Minimum Distribution would be about $37,700 ($1M/26.5).
That amount becomes taxable income for the year, assuming the account consists of pre-tax contributions.
The following year, the process repeats using your new account balance and updated life expectancy factor. Because investment values fluctuate, your RMD changes every year.
It’s a Minimum—Not a Recommendation
One misconception is that retirees should only withdraw their Required Minimum Distribution. That’s not necessarily true. The RMD simply establishes the minimum amount you must withdraw to satisfy IRS rules. If your retirement spending requires larger withdrawals, you can certainly take more. Conversely, if you don’t need the income, you’re still required to withdraw at least the minimum amount.
Many retirees find themselves withdrawing money they don’t actually need for living expenses.
Fortunately, you aren’t required to spend it.
After paying any taxes that are due, the remaining funds can be invested in a taxable brokerage account, gifted to family members, donated to charity if appropriate, or used for other financial goals.
Why Large RMDs Can Create Tax Problems
One challenge many retirees face is success. Imagine diligently saving for forty years. Your investments perform well. You retire with several million dollars in pre-tax retirement accounts. While that’s certainly a good problem to have, larger account balances often lead to larger Required Minimum Distributions. Those distributions increase taxable income, which can create several unintended consequences. You may move into a higher tax bracket. A larger portion of your Social Security benefits may become taxable. Higher income could also trigger increased Medicare Part B and Part D premiums through Income-Related Monthly Adjustment Amounts (IRMAA).
In other words, Required Minimum Distributions can create a ripple effect that extends beyond simply paying income taxes.
Planning Ahead Can Make a Difference
The good news is that Required Minimum Distributions don’t have to become a surprise. In fact, many of the best tax-planning opportunities occur before RMDs ever begin. Some retirees intentionally perform Roth conversions during lower-income years between retirement and age 75. By voluntarily paying taxes on smaller portions of their retirement accounts over several years, they may reduce future Required Minimum Distributions while increasing tax-free assets inside Roth accounts. Others strategically withdraw money from Traditional retirement accounts before RMD age to smooth taxable income across retirement instead of allowing large mandatory withdrawals later. The best approach depends on your pension, Social Security benefits, other income sources, and long-term estate planning goals.
What About Roth Accounts?
One of the advantages of Roth IRAs is that they are not subject to Required Minimum Distributions during the original owner’s lifetime. That’s one reason Roth accounts have become increasingly valuable in retirement planning. Money can continue growing tax-free for as long as you live, giving you greater flexibility over when—or whether—you withdraw it. Beginning in 2024, employer-sponsored Roth accounts such as Roth 401(k)s and Roth TSPs are also no longer subject to lifetime Required Minimum Distributions for the original owner. That change eliminated one of the biggest differences between Roth workplace plans and Roth IRAs.
Don’t Let the Tax Tail Wag the Dog
It’s easy to become so focused on avoiding Required Minimum Distributions that you lose sight of the bigger picture. After all, paying taxes often means you’ve successfully accumulated significant retirement assets. The goal isn’t to eliminate taxes completely. The goal is to manage them intelligently over your lifetime. Sometimes paying a little tax today prevents paying much more later. Sometimes leaving money in a Traditional account makes perfect sense.
Every retirement plan is different.
Cleared to Rejoin!
Required Minimum Distributions aren’t something to fear, but they are something to prepare for.
Understanding how they work gives you decades to make thoughtful decisions instead of rushed ones.
Whether that involves Roth conversions, adjusting withdrawal strategies, or simply knowing what to expect, planning ahead can help reduce surprises and potentially lower your lifetime tax bill.
Retirement planning isn’t just about building wealth. It’s also about deciding how—and when—that wealth will be taxed.
The sooner you understand Required Minimum Distributions, the more options you’ll have when retirement arrives.
Fight’s On!
Winged Wealth Management and Financial Planning LLC (WWMFP) is a registered investment advisor offering advisory services in the State of Florida and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal the performance noted in this publication.
The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Winged Wealth Management and Financial Planning (referred to as “WWMFP”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
All opinions and estimates constitute WWMFP’s judgement as of the date of this communication and are subject to change without notice. WWMFP does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall WWMFP be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if WWMFP or a WWMFP authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.