Key takeout
- Required Minimum Distributions (RMDs) mainly apply to traditional tax-deferred accounts, with a significant exception for Roth accounts.
- The RMD age shifted from 70 and a half to 72. Now, those who are currently 73 must start taking RMDs, which will change again to 75 by 2033.
- If you’re not retired yet, consider different account types to lower future RMDs. If you are retiring but haven’t triggered RMDs, think about withdrawing from traditional accounts early or convert to Roths while your taxable income is low. Those over 70 can utilize qualified charitable distributions, and if you’re over 73 and still working, RMDs can be avoided from your employer accounts.
- There may be innovative ways to flexibly manage RMD timing, like adjusting for market declines, though RMD calculations are based on prior year’s account balance.
- Using RMDs can also enhance your portfolio. The IRS doesn’t dictate where the withdrawn funds must come from, so if you don’t need the RMD, you can choose to reinvest the money.
Margaret Giles: Hello, I’m Margaret Giles from Morning Star. Retirement accounts often come with tax benefits upon contribution, but withdrawing funds requires following a set schedule. I’m joined by Christine Benz, who has insights about minimum distributions. Thanks for being here, Christine.
Christine Benz: Margaret, it’s a pleasure to be with you.
Which accounts are eligible for RMD?
Giles: Could you clarify which accounts are subject to RMDs and which aren’t? I’ve heard there have been updates.
Mercedes: Sure. Traditional tax-deferred accounts like traditional IRAs, 401(k)s, and SEPs are where RMDs apply. However, Roth IRAs and Roth 401(k)s are exceptions—they are not subject to RMDs. The recent changes have made Roth 401(k)s exempt from RMDs too, which was a bit of a twist.
Giles: Good to know it’s not set in stone.
Mercedes: Exactly.
How the age of the minimum distribution required changes
Giles: The RMD age has certainly been fluctuating. Can you explain its current state and future changes?
Mercedes: Historically, it was 70 and a half, then moved to 72. People who are 73 now need to start taking RMDs, with a future increase to 75 in 2033.
Why do high-income retirees like to hate RMD?
Giles: Why is it that wealthy retirees seem to despise RMDs?
Mercedes: Well, RMDs can bump up taxable income. Even if someone isn’t withdrawing from traditional accounts, they still must take RMDs and face taxes on that. This triggers additional costs, notably higher Medicare premiums for those above certain income levels.
How to lower or avoid RMD
Giles: Is there a way to reduce or bypass RMDs?
Mercedes: Yes, there are several strategies, depending on your current situation. For those still accumulating retirement assets, looking into other account types is useful. While traditional accounts have their advantages, Roth accounts and taxable brokerage accounts can provide more flexibility and immunity from RMDs. If you’re retired but not subject to RMDs, this is a key moment; you can manage your taxable income better. Consider withdrawing from traditional accounts or converting to Roths in low-income years. If you’re 70 and a half, you can also make charitable distributions directly from your traditional accounts.
For those over 73 still contributing to employer plans, it can be a way to sidestep RMDs from those accounts, provided you’re still employed. Even after RMDs kick in, wealthy retirees can consider conversions to optimize their tax situation.
Can we lower RMD by lowering RMD when the market is falling?
Giles: Is it possible to adjust RMDs to account for market downturns?
Mercedes: Yes, I get this question often. While it would be ideal to adjust RMDs based on market performance, the issue is that RMDs are calculated from the prior year’s account balance. So someone looking at RMDs in 2025 will base it on the amount as of December 31, 2024. Thus, fluctuations in the market don’t help with current year calculations.
There have been instances where Congress has paused RMDs during market downturns, like during the pandemic. These situations are rare, but they provide some context for when to consider adjusting RMDs.
How RMD improves your portfolio
Giles: Can RMDs actually present an opportunity for retirees?
Mercedes: Definitely. RMDs can enhance your portfolio. While you must take the distribution and pay taxes on it, the IRS doesn’t require you to withdraw from all holdings proportionally. You can take from investments that may not be performing well or reallocate funds to align with your goals. For instance, if you want to reduce exposure to U.S. stocks, you can take RMDs from those and leave other investments untouched.
Moreover, if you find yourself in a position where you don’t need that distribution, you can reinvest it. Those still working can contribute to their Roth IRAs or place funds into taxable accounts without the same restrictions relating to withdrawals.
Giles: Great way to put it, ending on a positive note. Thanks for your insights, Christine.
Mercedes: Thank you, Margaret.
Giles: I’m Margaret Giles from Morningstar. Appreciate you tuning in.
Learn more about Christine Benz and Margaret Giles.
