For most working adults, employer-sponsored retirement plans offer a great opportunity to save toward a nest egg - especially when factoring in employer matching contributions. Many companies will default savings to a minimal percentage via pre-tax dollars, with the option of increasing the deferral amount or even switching to after-tax, or Roth deferrals. 

Fast-forward to retirement: After working hard, saving well, and probably sacrificing along the way, it’s time to enjoy the fruits of your labor - how exciting! Maybe that means spending time with family and friends, enjoying hobbies that were put on the back burner, or traveling. 

While retirement, or financial freedom as we like to call it, is a huge milestone, there’s another important date to keep in mind: the Required Minimum Distribution (RMD) age. This is when the IRS requires annual withdrawals from pre-tax retirement accounts. Because these withdrawals are withdrawn from accounts like 401ks and Traditional IRAs, they’re generally taxed as ordinary income. 

Background:

RMDs usually begin between ages 72 and 75 (see below) and are calculated by dividing the prior year’s ending account balance by a life-expectancy factor provided by the IRS. Account custodians typically compute these required amounts at the start of the year.

Required Beginning Dates:

Born before 1950: Age 72 

Born between 1951 and 1959: Age 73

Born after 1960: age 75 

As you can imagine, saving for decades, coupled with compounding investment growth, can lead to robust balances in retirement accounts, subject to required distributions. Because distributions are structured to gradually increase each year and are taxed as ordinary income, it’s possible that these distributions can create a move into higher tax brackets.

 Let’s look at a basic calculation example:

Joanne turns 75 years old this year and had a balance in her Traditional IRA of $1,500,000 on 12/31/2024. Based on the IRS Uniform Lifetime Table, her life expectancy factor is 24.6, which means the RMD for 2025 is $60,976. That distribution is taxable as income.

*As the end of the year approaches, so does the deadline for RMDs. Keep in mind, distributions must be completed by December 31st, except for the first distribution; otherwise, an excise tax of up to 25% can be assessed. 

Distribution Options: 

For those who need to withdraw funds, the decision may be straightforward; for others, it can be more complex. As with any financial decision, it’s important to consider upcoming needs and personal values. The good news is that there are options when it comes to meeting RMD requirements, and it’s common to use a combination of them. 

Below are some frequently used approaches.

Regular Spending: RMDs can be viewed as a quasi “paycheck” for individuals who are already relying on distributions to cover regular expenses. Setting up monthly withdrawals can feel a lot like receiving a paycheck from a former job, which can help manage expenses and ease anxiety around distributions. Income tax and also be withheld for ease. 

Reinvestment: Don’t need the money right now? Since RMDs still have to be withdrawn, funds can be reinvested based on your goals. Depositing them into a non-retirement account keeps the dollars working for you and makes them available for future needs.

Gifting: Many find it important to financially support family members. RMD funds can be gifted to help with educational goals for grandchildren or provide financial assistance for a home down payment. The annual gift tax exclusion limit is $19,000 for 2025 and 2026.

Taxes: Depending on other income sources, the full RMD could be used to increase total tax paid for the year. This could make sense if there are multiple income streams where taxes aren’t withheld, to aggregate quarterly payments, or to simplify tax due by paying one lump sum. 

Qualified Charitable Distributions(QCDs): For charitably inclined individuals, QCDs are a powerful strategy to reduce taxable income while supporting meaningful causes. Funds are sent directly from the retirement account to a qualified 501(c)(3) organization, which allows the distribution to be excluded from taxable income. Although RMDS don’t start minimally until age 72, QCDs can be completed as early as age 70.5. The maximum amount per person for 2025 is $108k, and for 2026 is $115k.

Whether RMDs are many years away, approaching soon, or already being taken, it’s important to understand available options to stay in control of income, taxes, and the overall financial plan. For those still working or retired but not yet required to withdraw, there are opportunities to help manage future RMDs before they begin. A financial planner can recommend different strategies based on your specific goals and situation.