Required Minimum Distributions (RMDs) are one of the most important and misunderstood parts of retirement planning. Once you reach a certain age, the IRS requires you to withdraw money from your tax-deferred accounts each year. How you handle those withdrawals can significantly affect your taxes, Medicare premiums, and long-term income strategy.
What Are RMDs?
RMDs are the minimum amounts you must withdraw each year from certain retirement accounts, including: traditional IRAs, SEP and SIMPLE IRAs,401(k) and 403(b) plans, and most employer retirement plans.
The IRS lets you contribute to these accounts without paying taxes, under the assumption they’ll get to tax your withdrawals later. RMDs are how they ensure “later” eventually arrives.
When RMDs Start
As of current law, RMDs begin at age 73 for individuals who reach age 72 after 2022. A future change already built into law states that RMDs begin at age 75for individuals who will turn 74 after 2032.
Your first RMD must be taken by April 1 following the year you reach the required age. All subsequent RMDs are due by December 31 each year. Delaying your first RMD until April 1 means taking two distributions in the same calendar year which can increase your tax bill. This is one of the reasons it is important to have a financial advisor monitoring and guiding you on your required minimum distributions.
How RMDs Are Calculated
RMDs are based on two factors: your account balance on December31 of the prior year and your IRS life expectancy factor from the Uniform Lifetime Table. As you age, your life expectancy factor decreases which means your required withdrawal grows each year.
The Tax Impact of RMDs
RMDs are taxed as ordinary income. Large RMDs, especially later in retirement, can significantly increase taxable income.
Consequences of increasing your total taxable income can include increasing your Medicare premiums (IRMAA) by pushing you into a higher Medicare premium bracket, triggering more social security taxation up to 85% of your Social Security benefits, and reducing flexibility in your withdrawal strategy. This is why planning before RMD age is so important.
Planning Opportunities to Reduce Future RMDs
1. Roth Conversions Before RMD Age
Converting part of your IRA to a Roth earlier in retirement reduces future RMDs, creates tax-free income for later, and helps smooth out lifetime tax brackets. The window between retirement and age 73 is often the most powerful time for conversions.
2. Qualified Charitable Distributions (QCDs)
Once you reach age 70?, you can give money directly from your IRA to a qualified charity tax-free. These charitable gifts count toward your RMD, are not included in taxable income, and reduce Medicare and SocialSecurity tax effects. It’s one of the most tax-efficient ways to give.
3. Strategic Withdrawal Sequencing
Pulling from different account types intentionally can lower lifetime taxes, reduce future RMD pressure, provide stable income across market cycles.
4. Consolidate Accounts for Easier Management
RMDs must be calculated separately for each account type. Consolidating accounts simplifies your RMD planning by reducing complexity, preventing mistakes, and coordinating tax planning.
What Happens If You Miss an RMD?
The IRS imposes penalties for missed RMDs, though recent rules have reduced them. Penalty percentage varies based on how quickly the mistake is corrected. Still, missing an RMD triggers avoidable taxes, requires corrective distributions, and complicates your planning. It’s important to track deadlines and coordinate properly.
The Bottom Line
RMDs are a requirement, but also a planning opportunity. They affect taxes, Medicare premiums, investment strategy, retirement income sustainability, estate planning, and more.
Proactively managing RMDs can significantly improve retirement outcomes. The earlier the planning begins, the more flexibility and tax savings you gain.
At StrongBridge Wealth Advisors, we help families across Central Wisconsin and the Northwoods navigate RMDs with confidence through our holistic, personalized approach to retirement planning. Schedule a consultation with StrongBridge Wealth Advisors today.Together, we can work to keep you on-track toward your financial goals.
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