Retirement planning is all about control—how much you save, when you withdraw, and where your income comes from. But once you reach a certain age, the government steps in with a rule that can upend even the most carefully crafted withdrawal strategies: Required Minimum Distributions (RMDs).
RMDs represent the point where you must start taking money out of your tax-deferred retirement accounts—like traditional IRAs and 401(k)s—whether you need the funds or not. Understanding how RMDs work, when they start, and how to manage them strategically can make a big difference in maintaining financial stability and minimizing taxes in retirement.
The Basics: When and How RMDs Work
Currently, you must begin taking RMDs at age 73, with the age increasing to 75 by 2033 under the SECURE 2.0 Act. The amount you must withdraw is calculated using an IRS life expectancy table. You take your account balance as of the previous December 31 and divide it by the factor that corresponds to your age.
For example, if you’re 75 with a $750,000 traditional 401(k), the IRS factor is 24.6. Dividing your balance by this number means your required withdrawal is about $30,487 for the year. Withdrawing less can trigger penalties, while taking more is always allowed.
Early on, RMDs are roughly 4% of your account, but the percentage rises as you age—about 5% by age 80 and over 6% by 85. The purpose is clear: the government wants to ensure that tax-deferred money eventually becomes taxable.
When RMDs Disrupt Your Withdrawal Strategy
Many retirees use a “safe withdrawal rate”—often around 4%—to preserve their portfolios over time. However, RMDs follow the IRS schedule, not your personal plan. If most of your retirement wealth is in traditional accounts, you might be forced to take out more than you’d planned, potentially increasing your tax liability and depleting assets faster than desired.
Consider a retiree with a $2.5 million traditional 401(k). At age 73, their first RMD might be about $94,000. If they only planned to spend $70,000 that year, the extra withdrawal could feel like a burden. But here’s the key insight: you don’t have to spend it.
You Don’t Have to Spend Your RMD
Just because the IRS requires you to withdraw the money doesn’t mean it has to leave your investment plan entirely. You can reinvest your RMD in a taxable brokerage account—keeping it working for you in index funds, dividend stocks, or other investments.
This approach maintains portfolio growth potential while also offering flexibility. Additionally, when your heirs inherit a taxable brokerage account, they benefit from a step-up in cost basis, reducing potential capital gains taxes.
In contrast, inherited traditional accounts can be tax-heavy. Beneficiaries must fully deplete the account within 10 years, and withdrawals are taxed as ordinary income—potentially during their peak earning years.
Can You Convert RMDs into a Roth IRA?
This is a common question—and the answer is no. You cannot convert your RMD itself into a Roth IRA during your RMD year. The first dollars withdrawn from a traditional account in that year count toward satisfying your RMD and cannot be rolled over or converted.
However, after taking your RMD, you can choose to convert additional funds into a Roth to reduce future RMDs. For example, once you withdraw your required $150,000 RMD, you could convert another portion—say, $56,000—into a Roth to take advantage of a favorable tax bracket. Just remember to keep these transactions separate and well-documented.
Charitable Giving and RMDs
For those who are charitably inclined, there’s a powerful tax-efficient strategy called a Qualified Charitable Distribution (QCD). If you’re at least 70½ years old, you can send up to $100,000 per year directly from your IRA to a qualified charity. This amount can count toward your RMD while being excluded from your taxable income—a win-win for generosity and tax planning.
Note: QCDs are only available from IRAs, not 401(k)s.
Using RMDs for Family and Legacy Goals
Another creative use for RMD funds is contributing to a 529 college savings plan for children or grandchildren. While you’ll still owe income tax on the RMD, more than 30 states offer deductions or credits for 529 contributions. The funds grow tax-free and can be withdrawn tax-free for qualified education expenses.
In some cases, retirees can “frontload” five years’ worth of 529 contributions at once, effectively shifting assets out of their taxable estate while supporting future generations.
Managing Tax Implications
Adding RMDs to your income can push you into higher tax brackets, affect your Medicare premiums, or increase the taxable portion of your Social Security benefits. Strategic timing of withdrawals, Roth conversions, and charitable giving can help reduce these effects.
The Big Picture: Use It, Grow It, or Give It
At the end of the day, RMDs aren’t a punishment—they’re a prompt. You can:
- Use it – Fund your retirement lifestyle and enjoy what you’ve built.
- Grow it – Reinvest in a brokerage account and maintain flexibility.
- Give it – Support loved ones, education funds, or charitable causes.
The government dictates how much must come out, but you control what happens next. With careful planning, RMDs can become a strategic part of your retirement plan—not an obstacle to it.
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