What Is RMD and Why Is It Important to Me?
If you start to consider retirement planning, you will inevitably run across three important letters: “RMD”. Understanding what they mean and how they can affect you is important. Here’s a basic primer to help:
Why is it called RMD? RMD stands for “required minimum distribution”. Just to make things more complicated it is sometimes referred to as MRD, which is simply “minimum required distribution”. Regardless of the sequence of those letters, they represent the IRS rule on the minimum annual taxable distribution that needs to be withdrawn from a tax-deferred retirement plan such as a traditional IRA, 401(k), etc.
When do I have to start taking RMD out of my own IRA or 401(k)? The age at which you need to begin taking RMD has changed over recent years. Currently, the age is 73, but if you were born on or after January 1, 1960, your RMD age will be 75. There are some exceptions to taking RMD, primarily for those who are still working in companies that they do not have an ownership interest in.
Is RMD different if I inherited the IRA from someone else? Yes, the rules are substantially different when you inherit an IRA from someone else. Generally speaking, you have to fully distribute the inherited IRA and pay the taxes by December 31st of the year that includes the 10th anniversary of the original owner’s death (Short answer-you have 10 years to completely withdraw the inherited IRA). You may also have to take required minimum distributions in years 1 through 9 as well, but only if the original owner was required to take RMD before his or her death.
How is RMD calculated? RMD is calculated annually. There are two moving parts: the value of your IRAs on December 31st of the previous year and your age this year. The value of all of your IRAs on December 31st of the previous year is divided by the number corresponding to your age in the IRS tables. The result is your RMD for the current year.
When do I have to take RMD during the year? The only requirement is that you fully take your RMD by December 31st of that year. You can take it all at once or spread it out over the year as long as the total amount distributed by the end of the year is equal to or greater than your RMD number. The reason I underlined “greater than” is because RMD is simply the minimum amount you need to take. You can always take more if you have the need or the desire.
Do I have to take RMD out of each of my IRAs? Generally speaking, no. Although you typically will receive a statement from your financial institution showing what your RMD is from each IRA, you can usually satisfy it from any one or more of your IRAs. It’s the total amount of RMD withdrawn that the IRS is interested in, not that the RMD comes out proportionately from each IRA.
How does RMD affect my taxable income? The effect can be substantial. Every dollar withdrawn from the IRA is considered a dollar of taxable income, just as if you earned it by working. Most people will set up withholding, both Federal and State of Michigan, for each withdrawal they make so taxes are addressed immediately upon withdrawal. One way to minimize the tax impact of RMD is through the use of a Qualified Charitable Distribution (QCD). That IRS rule allows people over 70 ½ to donate directly from the IRA to a charity without the donation being considered taxable income. The limit on a QCD for 2025 is $108,000, and you don’t have to itemize to take advantage of this rule.
This is a basic description of what RMD is and how it works. The rules are extremely complex so don’t just rely on the statements above in your tax planning and RMD withdrawals. Give me a call or talk to your tax preparer before making any important decisions related to withdrawals from your own tax-deferred retirement plans or any IRAs that you inherit.
Fun fact: As we head into the heart of August and late summer, you might be interested in knowing that the month of August is named after the Roman Emperor Augustus Caesar. It marks the last month of summer (ugh!), which is often referred to as the “Dog Days of Summer” with the most hot and humid weather of the season.
