Required Minimum Distributions: Rules and Strategies

Qualified retirement accounts can be powerful tools in saving for your later years, but along with the benefits of pre-tax contributions and tax-deferred growth, there are limitations and rules that apply. A good thing can’t last forever, and―as the Beatles said―the taxman will eventually come for his cut. That’s where Required Minimum Distributions, or RMDs, come in. If you’ve reached your retirement years, or have explored this topic in your planning process, you may be familiar with RMDs. But regardless of your degree of experience, the rules around them change frequently as regulations are updated and it may be a good time to revisit some of the basics.

RMD Rules

A Required Minimum Distribution (RMD) is the amount the IRS dictates must be disbursed from a qualified (pre-tax) retirement account, such as a 401(k) plan or Individual Retirement Account (IRA) every year after you turn 73 or—for those born after January 1, 1960—after you turn 75. Your first RMD must be taken by April 1st of the year following the year you turn age 73, unless you are still working and are a participant in an employer-sponsored retirement plan (and are not a 5% owner of the company), in which case you may be able to delay your first RMD until April 1st of the year following the year in which you retire.

The amount to be taken in RMDs is determined by dividing the fair market value of all your qualified retirement accounts at the end of the previous calendar year by your life expectancy factor from the IRS uniform lifetime table. This calculation, of course, will vary on a year-to-year basis. You can use these IRS worksheets to calculate your RMDs.

After the first distribution, the deadline for withdrawing your RMD is December 31^st each year. Like all withdrawals from qualified retirement accounts, these disbursements are taxed as ordinary income. If you fail to withdraw enough, you may be subject to an initial penalty of 25% of the amount not distributed as required; however, this can be reduced to only 10% if you withdraw adequate funds within two years. (It may be possible to have the penalty waived if you correct the mistake and can demonstrate it was missed by a “reasonable error.”) Coldstream is careful to prevent these penalties for our clients, but we are aware of stories where they have occurred!

Inherited Accounts

Qualified accounts that are inherited by a beneficiary have their own sets of rules. If you inherit your spouse’s IRA, you have the option to roll over the account into your own IRA or keep it as an inherited account. For inherited accounts, including a non-spousal IRA, the ‘ten-year rule’ applies (the ‘five-year rule’ if the account owner died before 2020): the account must be emptied by the end of the 10^th (or 5^th) year following the year of the account holder’s death. If RMDs have started at the time of the account owner’s death, the beneficiary must also continue to take distributions based on their own life expectancy.

RMD Strategies

Don’t put off planning for RMDs until it’s time to take them! Planning ahead can have a substantial impact on your tax obligations over your lifetime and can ensure that you have more options during retirement. Here are some ideas and strategies to consider that can mitigate the tax consequences of RMDs:

Tax diversify your savings

One issue we see on occasion is a saver who aggressively funds their pre-tax qualified accounts. Then they find that when they reach RMD age, the withdrawals they need to take are large enough to bump them up into a higher tax bracket, leaving them with limited options.

With careful planning and diversified account types, you can create more opportunities to control your tax consequences when it comes time to disburse from the portfolio. For example, having the option to draw from a taxable account or Roth IRA, depending on the year and other income events that may be happening, can result in meaningful tax savings. Ideally this strategy starts as you begin to accumulate wealth and build your portfolio, but there are options for those who are further along.

Utilize a Roth conversion

For those with the lion’s share of their portfolio in a qualified account as they reach their early retirement stage, a Roth conversion may be a great strategy for lowering future RMDs. The conversion, ideally done in low earning years (or years with no earnings such as at the beginning of retirement), would ‘convert’ some of the qualified funds into a tax-free Roth account. Strategically paying taxes on those funds now creates a tax-diversified bucket from which to draw later. Ultimately, this can lower the future RMD amounts you need to take from the qualified account, giving you more levers to pull in your withdrawal phase.

Charitable giving as a tax strategy

For those in a position where they don’t need the income from RMDs and who also prioritize giving to charitable causes, Qualified Charitable Distributions (QCDs) are a great strategy to mitigate tax burdens. QCDs offer an option for those in their distribution phase to send their RMDs directly to qualified non-profits or charities. This has the advantage of avoiding taking the distributions as income altogether, and a QCD can often be more beneficial to your bottom line than a regular tax deduction for a donation of the same amount. QCDs are limited to $108k/year (in 2025), whereas a charitable donation can only be deducted up to a percentage of adjusted gross income. Read our recent article, “Qualified Charitable Distributions Are Gaining Momentum”  for more information on QCDs.

Final Thoughts

Required Minimum Distributions are an unavoidable aspect of retirement planning for many, representing the IRS’s method of ensuring that taxes are eventually paid on pre-tax retirement savings. As the rules surrounding RMDs continue to evolve with legislation like the SECURE Act 2.0, and penalties for failing to adhere to those rules can be stiff, it’s critical to stay informed.

While your retirement savings portfolio likely marks the culmination of years of diligent saving, it doesn’t have to be a source of unexpected tax burdens. Proactive planning, ideally initiated well before RMD age, can significantly mitigate the impact. The strategies we describe here, such as strategic Roth conversions in lower-income years and the utilization of Qualified Charitable Distributions (QCDs) for philanthropic individuals, offer powerful avenues to manage tax liabilities and maintain flexibility in your retirement income.

Ultimately, navigating the complexities of RMDs and optimizing your distribution strategy requires a nuanced understanding of current tax laws and your personal financial situation. We highly recommend consulting with a qualified financial professional to ensure that your retirement plan is robust, tax-efficient, and aligned with your long-term goals. Reach out to your Coldstream advisor if you would like to discuss these topics further.

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