RMDs Are Coming Whether You're Ready or Not

The IRS Doesn't Wait for You to Be Ready

There is a specific birthday that matters more to your tax return than almost any other, and it has nothing to do with when you plan to retire or when you plan to claim Social Security. Once you turn seventy-three, the IRS requires you to begin withdrawing a minimum amount from most tax-deferred retirement accounts each year, whether you need the money or not. That withdrawal is called a required minimum distribution, or RMD, and understanding how it works, and how it interacts with everything else on your tax return, is one of the more important pieces of pre-retirement planning.

## How RMDs Are Calculated

Your RMD each year is calculated by taking your account balance as of December 31 of the prior year and dividing it by a life expectancy factor published by the IRS in what is called the Uniform Lifetime Table. As you get older, that factor shrinks, which means the required percentage of your account you must withdraw each year gradually increases, from roughly 3.8 percent at age seventy-three to over 6 percent by your mid-eighties. Roth IRAs are not subject to RMDs during the original owner's lifetime, which is one of the reasons Roth conversions earlier in retirement can be so valuable. Traditional IRAs, Traditional 401(k)s, SEP IRAs, and similar accounts are all subject to the rule.

Missing an RMD is expensive. The penalty for not withdrawing the full required amount by the deadline is twenty-five percent of the amount that should have been withdrawn, though that penalty can be reduced to ten percent if corrected within two years. This is not a rule to overlook.

## Why RMDs Rarely Arrive Alone

The real complexity with RMDs is not the calculation itself. It is what else is happening on your tax return in the same year. By the time most people reach seventy-three, they are also collecting Social Security, and RMD income gets added directly on top of it when determining how much of that Social Security benefit becomes taxable, up to as much as eighty-five percent. The combined total also determines your modified adjusted gross income, which is what Medicare uses, on a two-year lookback, to decide whether you owe an income-related surcharge on your Part B and Part D premiums, commonly known as IRMAA. A large RMD in one year can trigger a jump in Medicare premiums two years later, even if your income drops back down in the meantime.

None of this means RMDs are avoidable. They are not. It means the years before they begin are worth using deliberately, rather than treating age seventy-three as a distant problem for future you to sort out.

## What You Can Actually Do About It

A few strategies exist to soften the impact of RMDs, and most of them require action before the RMDs actually begin. Roth conversions in the years leading up to seventy-three shrink the balance that will eventually generate a required distribution, since converted dollars move into an account that has no RMD requirement at all. For those who are charitably inclined, a qualified charitable distribution allows individuals age seventy and a half or older to send up to a set amount directly from an IRA to a qualifying charity each year, and that amount counts toward satisfying the RMD while being excluded from taxable income entirely, rather than simply being deducted after the fact. Spacing out withdrawals, timing other income around RMD years, and reviewing account balances well before seventy-three all give you more room to manage the outcome than waiting until the requirement is already in force.

## A Faith-Forward Perspective

Wisdom does not wait for a deadline to force a decision; it prepares ahead of the need. RMDs are one of the more predictable events in a retirement plan, known years in advance, which makes them one of the easier ones to plan around rather than simply absorb when they arrive.

## Next Step

If you are within ten years of turning seventy-three, it is worth projecting what your RMDs are likely to look like, how they will stack with Social Security, and whether steps taken now, particularly around Roth conversions, could meaningfully change that picture. The earlier this review happens, the more options remain on the table.