Determining how much to take out of your retirement accounts can be complicated. There are many factors to consider, such as how your spending needs will likely change over time (whether planned or not). You’ll also need to think about how long your sources of income (Social Security, pension, retirement funds) need to last, how much income each will provide and when you’ll begin receiving those payments.

When it comes to your retirement funds, it’s important to be aware that some accounts require withdrawals at a certain time. Here’s a brief overview of required minimum distributions (RMDs) and how they can fit into your retirement strategy.

What are RMDs?

Once you turn 73, you’re generally required to start withdrawing from certain retirement accounts (such as your traditional IRA, 401(k) or similar employer-sponsored retirement plans) in what is known as a required minimum distribution (RMD). If you don’t, you’ll take a significant hit — the IRS penalty for not taking the RMD is 25% of the amount not taken by the deadline (though may be lower if corrected in a timely manner). The deadline to take your first RMD is usually April 1 of the year after you turn 73, and Dec. 31 each year after that.

Your RMD for any year is the account balance as of the end of the prior calendar year divided by a life expectancy factor according to the IRS.

If you’d like more information on the requirements of your RMD, be sure to get in touch with your Edward Jones financial advisor. Additionally, the IRS provides resources to help you calculate your RMD.

How can you use your RMDs?

If you need your RMD to pay for your living expenses in retirement, it should be one of the first sources you draw from since you’re required to take that money. However, if you don’t need it to pay for living expenses, you can use your RMD in a myriad of ways.

  • For instance, you could reinvest the cash into a taxable account so it can continue to grow. Or, if you want that money to go to others, you can open or contribute to a 529 account for your grandchildren or even help your adult children “max out” their IRAs. In fact, you can give up to $17,000 per year, per recipient, without incurring any gift taxes — an amount far higher than the current annual IRA contribution limit of $6,500 (or $7,500 for individuals 50 or older).
  • Additionally, if you qualify, you can make a qualified charitable distribution (QCD) by transferring assets directly from your IRA to a qualified charity. A QCD can satisfy all or part of your RMD from your IRA, and you can exclude up to $100,000 of QCDs from your taxable income each year per taxpayer, which can help lower your tax bill.  
  • Or, when thinking about your legacy, consider using your RMD to cover life insurance costs. You can put this money into an irrevocable life insurance trust, which provides estate tax benefits and lets you avoid gift taxes.

How can I reduce future RMDs?

A few common strategies may help reduce future RMDs or delay when they must be taken.

  • Convert assets to a Roth account: While taxes will apply on the converted amount, RMDs will not be required in the future.
  • If you’re still working, roll assets subject to an RMD into your current employer plan. RMDs from your current employer plan will not be required until April 1 after the year you retire.
  • Take distributions before age 73 and/or take larger distributions in years you are in a lower tax bracket. Future RMDs will be lower, and you may be able to reduce your taxes.

Also, if you’re considering a rollover or conversion strategy, understand that you can’t roll or convert any RMDs in the year they’re due. In other words, you must distribute the RMD amount due that year.

How we can help

Before you decide what to do with your RMD funds, talk with your Edward Jones financial advisor to help you determine which option is right for you.