Starting Simple: Understanding Required Minimum Distributions

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Starting Simple: Understanding Required Minimum Distributions

As with most planning techniques, the most effective ones begin with starting simple.

Many have enjoyed the benefits of tax deferred retirement accounts, from the immediate tax deduction for contributions to the tax-deferred growth over perhaps many decades. At some point, distributions must begin so that the government can start collecting much-needed tax revenue from these accounts. While required minimum distributions are generally understood, given recent tax law changes, a review of some of the finer points may make your planning more efficient.

Understanding Required Minimum Distributions

You may have heard about them and/or might even be taking them already.

Once you reach a certain age, the IRS requires you to withdraw a minimum amount each year from your pre-tax retirement accounts, such as traditional IRAs and 401(k)s.

Required: You must take the distributions or face penalties.
Minimum: You can always take out more, but not less.
Distribution: Money is withdrawn from the retirement account.

According to the IRS, about 75% of IRA owners withdraw only the required minimum, while about 25% withdraw more.[1]

Why Do I Have To Take Required Minimum Distributions?

To understand why distributions are required, it’s helpful to understand how these accounts are funded and the benefits enjoyed as a result.

The government wants people to save more for retirement, so it provides significant financial incentives to contribute to retirement accounts. You get an immediate income tax deduction when you contribute to pre-tax retirement accounts and your investments can grow tax-deferred, allowing more savings to compound over time.

The government also needs tax revenue to operate. Since contributions and earnings to these accounts have never been taxed, they require you to take taxable distributions when you reach a certain age, thereby providing tax revenue for the government.

When Do I Have To Start Taking Required Minimum Distributions?

Here’s a table for you to see the starting age for taking these distributions under current law:

Birth Year	RMD Latest Starting Age	First RMD Due
1950 or earlier	70½	By April 1 of the year after turning 70½
1951 – 1959	73	By April 1 of the year after turning 73
1960 or later	75	By April 1 of the year after turning 75

You can withdraw from retirement accounts without incurring a 10% penalty as early as age 59½.

What Does ‘First Required Minimum Distribution Due’ Mean?

You must take your first distribution by April 1 of the year after you reach your required minimum distribution age. If you delay until that following year, you will have to take two of the required minimum distributions in that same year – one for the year when you turned the required age, and one for the following year.

What Happens If You Do Not Take Your RMD?

Missing a required minimum distribution comes with a steep penalty. Until recently, it was 50% of the amount you failed to withdraw. Thanks to recent law changes, that penalty has been reduced to 25% and, in some cases, as low as 10%, if corrected quickly.[2] Still, the consequences are serious.

What About Inherited IRAs?

If you inherit an IRA, the distribution rules depend on your relationship to the original owner and when you inherited it. For example, spouses often have more flexibility and can treat the account as their own. Most other beneficiaries who inherited IRAs after 2020 must follow the 10-year rule, meaning the account must be emptied within 10 years of the original owner’s death, and distributions may be required annually. Finally, certain “eligible beneficiaries” (minor children, disabled individuals, or those close in age to the account holder) may still use a longer payout schedule known as “stretch.”

The IRS has issued evolving guidance, which makes personalized advice especially important in these cases.

How are RMDs calculated?

For most tax-deferred retirement accounts, required minimum distributions are calculated based on your age, your actuarial life expectancy, and the account balance as of Dec. 31 of the prior year. The IRS provides several actuarial tables, which were last updated in 2022.

Here is an example of a calculation for a 75-year-old with a $1 million IRA balance at the end of last year. The Uniform Lifetime Table shows a life expectancy factor of 24.6. Dividing the prior year-end balance by the factor gives you the RMD:

$1,000,000 ÷ 24.6 = $40,650

Each year, the factor decreases, reflecting your shorter remaining life expectancy.

Most people use the Uniform Lifetime Table, but two other tables apply in certain circumstances:

Joint Life and Last Survivor Expectancy Table – Used when your spouse is your sole beneficiary and is more than 10 years younger than you. This produces a smaller required minimum distribution than the Uniform Table because the expected payout period is longer.
Single Life Expectancy Table – Used by certain beneficiaries of inherited IRAs and retirement accounts (for example, surviving spouses, minor children, disabled or chronically ill individuals, or beneficiaries not more than 10 years younger than the decedent).

RMDs and Taxes

Required minimum distributions are taxed as ordinary income. For some retirees, this can push them into a higher tax bracket, raise Medicare premiums, and affect how much of their Social Security is taxable.

Are All RMDs Subject to Taxes?

No, and there is one great exception. If you are charitably inclined and at least 70½ years old, you can direct up to $108,000 per year in 2025 (indexed) from your IRA directly to a qualified charity or charities through a qualified charitable distribution.

It helps because the charitable distribution counts toward your required minimum distribution, the amount is excluded from your taxable income, and it may reduce your overall tax bill, Medicare premiums, and Social Security taxes. In addition, you get the tax benefit even if you don’t itemize when filing your taxes.

Qualified charitable distributions can only be made directly to qualified public charities.[3] Donor advised funds, private foundations, and supporting organizations are explicitly excluded. The purpose of this rule is to make sure that your charitable distribution goes directly and immediately to a charity.[4]

How Is the Roth IRA Different?

In my opinion, a Roth IRA is one of the greatest financial gifts Congress has given the American people. Roth IRAs are funded with after-tax money, so neither earnings nor distributions are subject to income taxes.

Do Roth IRAs Have RMDs?

Roth IRAs do not have required minimum distributions for the original owner. One of the biggest advantages of Roth IRAs is that there are no required minimum distributions during your lifetime. This allows assets to grow tax-free for as long as possible. Non-spousal heirs who inherit a Roth IRA are subject to withdrawal rules, but distributions remain tax-free.

This is why Roth IRAs are often the last pool of money people should touch in retirement. It is also why they are ideal to leave to non-charitable beneficiaries. (If you want to leave assets to charity, it is better to leave the pre-tax retirement accounts to charity.) Rather than serving as just a retirement vehicle, a Roth IRA can be a potent estate planning tool as well. Depending on your unique situation, a full or partial Roth IRA conversion might be a good addition to your planning.

Final Thoughts

Required minimum distributions are an important part of retirement income and tax planning. The rules have changed in recent years, and the right strategy depends on your personal circumstances. This subject matter can get complicated very quickly, so see IRS publication 590-B for more details and contact your accountant or financial advisor with any questions.

This article does not constitute investment advice. You should always check with your advisors for guidance based on your specific goals and circumstances.

Jacques E. Boubli, CFP^® is a partner at The Portfolio Strategy Group, a registered investment advisor established in 1990. He provides investment advice and financial planning guidance to PSG’s clients. He holds an MBA from NYU’s Stern School of Business and is a Certified Financial Planner.

This article will appear in a forthcoming issue of EASL Journal, the publication of the Entertainment, Arts and Sport Law Section. For more information, please visit nysba.org/easl.

[1] Howard Gleckman, Treasury Should Review IRA Minimum Distribution Tables But Changes Would Help Few Seniors, Tax Policy Center (Sept. 7, 2018), https://taxpolicycenter.org/taxvox/treasury-should-review-ira-minimum-distribution-tables-changes-would-help-few-seniors.

[2] Qualified public charities are organizations that have been approved by the IRS as tax-exempt under section 501(c)(3) of the Internal Revenue Code and that receive broad public support, such as churches, schools, hospitals, and publicly supported foundations.

[3]IRC § 4974, as amended by the SECURE 2.0 Act of 2022.

[4] The IRS wants the QCD to go to a charity that will put it to work right away. That is why donor advised funds, private foundations, and supporting organizations are excluded, because while they are charities themselves, they do not necessarily put the money to work right away.