Facing required minimum distributions for the first time can feel like an unexpected pay bump — and an unexpected tax bill. If an adviser hasn’t walked through the options, retirees should press for a plan that covers timing, tax impact and ways to reduce the income hit from RMDs, experts say.
Required minimum distributions apply to most tax‑deferred retirement accounts — traditional IRAs, SEP and SIMPLE IRAs, and employer plans such as 401(k)s — and they are taxed as ordinary income when taken. Roth IRAs are exempt from RMDs during the original owner’s lifetime (Roth 401(k)s are subject to RMD rules unless rolled into a Roth IRA). The age at which RMDs begin changed under the SECURE 2.0 Act: the starting age rose to 73 beginning in 2023 and will increase to 75 in 2033. Those who miss their RMDs face stiff penalties, though SECURE 2.0 reduced the excise tax for failures from 50% to 25% (and to 10% if corrected quickly under IRS rules).
There are several common strategies retirees should discuss with their adviser. One is timing: first‑year RMDs may be delayed until April 1 of the year after the owner reaches the RMD age, but delaying creates the potential for two taxable distributions in the same calendar year (that year’s RMD plus the prior year’s delayed RMD). Another is tax withholding and estimated tax payments — either elect withholding from the IRA distribution or make quarterly estimated payments to avoid underpayment penalties and surprises at tax time.
Tax planning options include partial Roth conversions and qualified charitable distributions (QCDs). Converting some tax‑deferred assets to a Roth before RMDs start can reduce future required distributions because Roth IRAs are not subject to lifetime RMDs; conversions are taxable in the year they occur, so they should be balanced against current tax brackets. QCDs — direct transfers from an IRA to an eligible charity, subject to IRS limits — can satisfy all or part of an RMD and exclude that money from taxable income for those who qualify, which can be especially useful for reducing adjusted gross income and limiting Medicare premium surcharges or taxation of Social Security benefits.
Other considerations: coordinating RMDs with Social Security claiming decisions, Medicare IRMAA thresholds, and other sources of income; rebalancing portfolios as distributions are taken; and reviewing beneficiary designations and estate plans. The SECURE Act of 2019 and SECURE 2.0 have also tightened rules around beneficiaries — the so‑called “stretch” IRA is largely gone for many non‑spouse beneficiaries, replaced by a 10‑year distribution window — so advisers should factor legacy planning into distribution strategies.
If an adviser hasn’t proactively raised these points, ask for a simple, dated plan that spells out expected RMD amounts for the next several years, estimates of the tax impact (including state taxes), and recommended actions such as Roth conversion windows, QCD targets, withholding elections or estimated tax payment schedules. A clear written plan helps avoid costly mistakes and lets retirees decide whether their current adviser is equipped to manage the practical and tax implications of RMDs.