Required Minimum Distributions: What You Need to Know

If you have a traditional IRA, 401(k), or other tax-deferred retirement account, the IRS eventually requires you to start withdrawing money — whether you need it or not. These are called Required Minimum Distributions, or RMDs. Understanding how they work, when to take them, and how to use them strategically can make a real difference in your retirement income plan.

What Are RMDs?

RMDs are the minimum amounts the IRS requires you to withdraw annually from most tax-deferred retirement accounts once you reach a certain age. Thanks to the SECURE 2.0 Act, the RMD starting age is now 73 for many people (and will increase to 75 in 2033). The amount you must withdraw each year is calculated based on your account balance at the end of the prior year and IRS life expectancy tables. Failing to take your RMD — or taking less than required — results in a significant tax penalty: up to 25% of the amount not withdrawn.

Is There a Better Time to Take Your RMD?

Yes — timing matters. While you can take your RMD any time during the calendar year, there are a few approaches worth considering:

Early in the year: Taking your RMD in January or February gives you control over the funds sooner. This can be useful if you rely on the income for living expenses or want to reinvest the money outside of tax-deferred accounts.

Later in the year: Waiting until later in the year keeps your money growing tax-deferred longer. However, it creates a risk — if you wait until December and something comes up, you could miss the deadline.

Monthly installments: Some retirees prefer to spread their RMD across the year in monthly withdrawals. This approach simplifies cash flow management, helps with tax withholding, and avoids the pressure of a single year-end transaction.

There is no universally "best" time — but having a deliberate plan is always better than waiting until the last minute. Coordinating your RMD timing with your overall tax situation can also help minimize your tax burden for the year.

The Power of Giving Your RMD to Charity

If you are charitably inclined, one of the most tax-efficient strategies available to retirees is the Qualified Charitable Distribution, or QCD. A QCD allows individuals age 70½ or older to transfer up to $111,000 per year (indexed for inflation) directly from their IRA to a qualified charity — and that amount counts toward your RMD without being included in your taxable income.

Why does this matter? Consider the alternative: if you take the RMD as income and then donate to charity, you still report the withdrawal as taxable income. The deduction may help, but it is only beneficial if you itemize — and many retirees take the standard deduction. With a QCD, the charitable gift never touches your taxable income at all.

The benefits of a QCD can include: reducing your adjusted gross income (AGI), which may lower your Medicare premiums, reducing the amount of Social Security that is subject to tax, and fulfilling your charitable goals in a highly efficient way.

To use a QCD, the distribution must be made directly from your IRA to the qualified charity — you cannot receive the funds first and then donate them. Work with your financial advisor and the charity to ensure the transfer is done correctly.

Take the Next Step

RMDs do not have to be a source of stress. With the right planning, they can become an organized part of your retirement income strategy — and even a vehicle for meaningful charitable giving. Reach out today to discuss how RMDs fit into your overall retirement plan.

Disclosure

Securities offered through Cetera Wealth Services, LLC, member FINRA/SIPC. Advisory Services offered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity. For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Wealth Services, LLC nor any of its representatives may give tax or legal advice. All investing involves risk, including the possible loss of principal.

This blog is for educational and informational purposes only.

Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Tax Deferral - 10% IRS penalty may apply to withdrawals prior to age 59 ½

Source: Give From Your IRA | AARP Foundation.