Required minimum distributions: What to know

Consider both how you withdraw your RMDs and what you do with the money.

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Key takeaways

  • You normally need to take required minimum distributions (RMDs) from certain retirement accounts at 721, whether or not you need the money. However, the CARES Act temporarily waives RMDs for all types of retirement plans (including IRAs, 401(k)s, 403(b)s, 457(b)s, and inherited IRA plans) for the calendar year 2020. This includes the first RMD, which individuals may have delayed from 2019 until April 1, 2020.
  • When the December 31 deadline for taking RMDs is reinstated, it will once again be critical to withdraw your RMDs before the deadline in order to avoid IRS penalties.
  • Plan ahead for what you want to do with the money—it may help reduce taxes and increase options for re-investing. 

You've saved for years to get to retirement, and it may soon be time to dip into those savings. Knowing your options and planning ahead can help you maximize your withdrawals.

What is an RMD?

Once you reach age 72,1 the IRS generally mandates that you take required minimum distributions, or RMDs, each year from traditional IRAs or employer-sponsored retirement accounts.2 RMDs can be an important part of your retirement income plan, but they come with some strict rules, so having an RMD strategy can help.

Note that the CARES Act has waived RMDs for 2020, including the first RMD, which individuals may have delayed from 2019 until April 1, 2020. But beginning in 2021, RMDs are back in force.

If you have assets that are subject to RMDs, here are 2 key questions to answer that can help you think through how and when to use your RMDs.

How and when should I withdraw my RMDs?

You can opt to take one-time distributions for your RMDs year after year, but the easiest way to satisfy your RMD is by setting up automatic withdrawals. This way, you avoid the potentially costly consequences of forgetting to take your RMD. Distributions can be taken in the form of a check sent to you, or a transfer to your bank, brokerage, or cash management account. You choose when you want to receive the funds, monthly, annually, or a schedule of your choosing.

Regardless of the withdrawal schedule, the deadline is important. The IRS penalty for not taking an RMD, or for taking less than the required amount, is steep: 50% of the amount not taken on time. The deadline to take your first RMD is normally April 1 on the year after you turn 72,1 and December 31 each following year. For 2020, RMDs are waived, including the first RMD.

Tip: Many people choose to have taxes withheld from their RMDs. If you choose not to do this, make sure you set aside money to pay the taxes. And be careful, sometimes underwithholding can result in a tax penalty.

What should I do with my RMDs: 4 options

You have plenty of options for how to use your withdrawals. Among them: living expenses, investments, wealth transfer, and/or charitable donations. "Making the best use of your RMDs can help avoid costly mistakes," advises Ken Hevert, senior vice president at Fidelity. "If you don't plan to use that money for current living expenses, there are some key decisions to make—whether you want to reinvest it, gift it to your heirs now, or donate it to a charity."

1. Use the money for living expenses

If you plan to use RMDs to pay for current expenses, it often makes sense to align with a budget in retirement. Going through the budgeting process can help you estimate living expenses, manage your cash flow, and determine if you'll need to use your RMDs to fund your retirement lifestyle.

2. Use the money for new investments

For some retirees, Social Security benefits and other income may cover your expected expenses. Remember, even though you may not need RMD monies to fund your retirement spending, you're still required to take RMDs out of your applicable retirement accounts. Although your RMD can't be reinvested back into a tax-advantaged retirement account, you can put money into taxable brokerage accounts and then reinvest your RMD proceeds.

Tip: If you have investments in your retirement account that may be difficult to sell (such as inherited stock with restrictions), consider transferring them in-kind to a nonretirement account. This helps satisfy your RMD (you'll still owe the taxes on the distribution), but allows you to stay invested in the security. The cost basis (what you originally paid) on the investment in the taxable account will be reset on the day of the transfer.

3. Use the money for wealth transfer to a loved one

There are several tax-smart ways to pass money to your loved ones. If you'd like to help give someone’s education a head start, consider using your RMD to fund a 529 college savings account. Using the 5-year gift tax averaging strategy, you can contribute up to $75,000 every 5 years. Another option is to convert some of your traditional IRA assets to a Roth IRA, which can be inherited without as many tax implications. With this "Roth conversion" strategy, you'll no longer have to worry about RMDs on the amount converted, because RMDs are not required during the lifetime of the original account owner in a Roth IRA.2

Here's how it works: Say Susan hypothetically had a traditional IRA and wants her 3 children to inherit the bulk of her estate. When she converts her traditional IRA to a Roth IRA, she'll pay taxes on the conversion, reducing the size of her estate.

Her Roth IRA is not subject to any additional taxes (assuming Susan has had a Roth IRA for 5 years and doesn't make any nonqualified withdrawals) or RMDs. Upon her death, her children would inherit their share of her Roth IRA—income tax-free.

Later on, Susan's heirs will have to take RMDs on their inherited Roth IRA each year after they inherit the account. As long as the distributions are qualified Roth IRA distributions, they won't be taxed on those distributions, which potentially increases the after-tax value of their inheritance.

Remember, if you're already over 72,1 you will have to take an RMD before you can convert to a Roth IRA. The upside is that you can then use all or part of the RMD to pay the taxes due from the conversion. However, if you anticipate that your heirs will be in a much lower tax bracket than your own, it may not make sense to convert.

While Roth IRAs are generally not subject to federal or state income taxes, they are still subject to estate tax, so it is important to plan accordingly. Since there are other ways to transfer money to heirs, such as trusts and gifting, consult an estate planning advisor before making any decisions.

4. Use RMDs for charitable donations

If you have to satisfy an RMD and you would also like to make a gift to charity, then consider a qualified charitable distribution (QCD).

A QCD is a direct transfer of funds from your IRA custodian, payable to a qualified charity. Once you've reached age 72, the QCD amount counts toward your RMD for the year, up to an annual maximum of $100,000. It's not included in your gross income and does not count against the limits on deductions for charitable contributions. These can be significant advantages for certain high-income earners.

Due to changes enacted by the Tax Cuts and Jobs Act, a number of retirees may now choose to take the standard deduction when filing taxes ($12,400 for singles; $24,800 for couples in 2020). For people who are taking the standard deduction on their taxes (as opposed to itemized deductions), QCDs—which do not depend on itemization—may be a useful alternative.

Most importantly, plan ahead

Whichever scenario applies to you, RMDs are likely to play an important role in your finances in retirement. Building a thoughtful retirement income plan can help you use RMDs in the most effective way, and help you reach your important financial goals. At the very least, it's important to spend some time understanding RMDs and your options with a financial and tax professional, to ensure that you are meeting the IRS requirements—and to help avoid a costly tax mistake.

Next steps to consider



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FAQs about RMDs


Get answers to frequently asked questions about RMDs.

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