As we approach the end of the year, one of the most important financial tasks for retirees is Required Minimum Distribution (RMD) planning. Whether you’re managing your own retirement accounts or helping a loved one, overlooking your RMD can result in unnecessary taxes and steep penalties. Let’s walk through what you need to know to finish the year strong.
What Are RMDs?
RMDs are the minimum amounts that retirees must withdraw annually from most tax-deferred retirement accounts once they reach a certain age. This applies to Traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored retirement plans like 401(k)s.
As of 2023, the starting age for RMDs is 73. That means if you turned 73 in 2025, your first RMD is due by April 1, 2026. For everyone else already in RMD territory, your distribution must be taken by December 31, 2025.
Why Year-End Planning Matters
Failing to take your RMD on time can trigger a 50% excise tax on the amount you were supposed to withdraw. While the IRS has recently provided some leniency and penalty relief in certain cases, it’s still better to avoid mistakes altogether.
Year-End Planning Considerations
1. Double Check Your RMD Amount
Your RMD is based on your December 31st account balance from the previous year and a life expectancy factor from IRS tables. If you have multiple retirement accounts, especially from different custodians, it’s easy to miscalculate or miss one. Consolidating statements or working with an advisor can simplify the process.
2. Consider Withholding for Taxes
RMDs count as ordinary income. To avoid a surprise tax bill next spring, you may want to withhold federal and state income taxes directly from your distribution. This can also help satisfy your estimated tax obligations if you haven’t been making quarterly payments.
3. Explore Qualified Charitable Distributions (QCDs)
If you’re 70½ or older, you can donate up to $100,000 per year directly from your IRA to a qualified charity. This counts toward your RMD but is not included in your taxable income, which can lower your adjusted gross income and even reduce Medicare premiums. This is an excellent strategy for those who don’t need the RMD funds and are charitably inclined.
4. Coordinate with Other Income Sources
If you’re receiving Social Security or have other sources of income, your RMD could push you into a higher tax bracket. Timing and tax planning can help smooth out income and minimize the impact.
RMDs are more than a regulatory requirement, they’re a planning opportunity. Whether you’re aiming to reduce your tax bill, give to charity, or align withdrawals with your lifestyle needs, don’t wait until the last minute. Schedule time to review your accounts, calculate the correct withdrawal, and explore strategies that fit your goals.
Questions?
If you need guidance with your year-end RMD planning, please reach out to me at 301-990-9170 or email geoff@montgomeryfinancialpartners.com.
Recent Comments