By: Reed C. Fraasa, CFP®, RLP®, AIF®
You've saved diligently for decades—building up balances in your traditional IRAs, 401(k)s, and other retirement accounts. But eventually, Uncle Sam comes calling. Those tax-deferred dollars can't stay sheltered forever, and at a certain age, you must start taking money out—whether you need it or not. These withdrawals are called Required Minimum Distributions (RMDs), and how you handle them can have ripple effects across your entire tax picture, retirement income strategy, and even your estate plan.
What Are Required Minimum Distributions?
Required Minimum Distributions are the minimum amounts the IRS requires you to withdraw each year from most tax-deferred retirement accounts once you reach a specific age. These include traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and 403(b)s. Roth IRAs are exempt during your lifetime, though inherited Roth IRAs are subject to their own rules.
The purpose is simple: the IRS has let you defer taxes for years and now wants its share. Every dollar you take out as an RMD counts as ordinary income, subject to your marginal tax rate in the year of withdrawal.
As of 2025, the RMD starting age is 73, following updates from the SECURE 2.0 Act. This age will gradually increase to 75 for those born in 1960 or later. The IRS provides Uniform Lifetime Tables to calculate each year's RMD based on your account balance as of December 31 of the previous year and your life expectancy factor.
When Do You Need to Start Taking RMDs?
Your first RMD must be taken by April 1 of the year after you turn 73. Every subsequent RMD must be withdrawn by December 31 each year. If you delay your first RMD until April 1, you'll need to take two distributions that year—one for the previous year and one for the current year—which can bump you into a higher tax bracket.
Failing to take your full RMD can result in a steep penalty—a 25% excise tax on the amount you should have withdrawn (reduced to 10% if corrected promptly). That's a costly mistake for something that can be planned around.
How RMDs Affect Your Taxes and Income Planning
RMDs don't exist in isolation—they interact with your other sources of income, such as Social Security, pensions, dividends, or part-time work. Because RMDs count as ordinary income, they can push you into a higher marginal tax bracket, trigger higher Medicare premiums (via IRMAA surcharges), and cause more Social Security benefits to become taxable.
For example, imagine a retiree who plans to live primarily off Social Security and investment income. When RMDs begin, their taxable income may suddenly spike, potentially pushing them into a higher bracket just as they were getting comfortable in retirement. Even modest RMDs can trigger unexpected tax consequences if not managed strategically.
This is why RMD planning should start years before your first withdrawal. Treating RMDs as part of your broader marginal tax bracket management—not a standalone requirement—can help you preserve flexibility and minimize lifetime taxes.
The Role of Roth Conversions in RMD Planning
The Roth IRA conversion is one of the most effective tools for managing future RMDs. Converting part of your traditional IRA to a Roth IRA before RMD age allows you to pay taxes on your terms, potentially at a lower rate, and reduce future RMDs since Roth IRAs aren't subject to RMDs during your lifetime.
Here's how it works:
Each year before age 73, you can choose to convert a portion of your traditional IRA to a Roth IRA. The converted amount counts as taxable income that year, but once in the Roth, it grows tax-free and can be withdrawn tax-free in retirement. By "filling up" lower tax brackets in your 60s or early 70s with planned conversions, you can strategically reduce the size of your tax-deferred accounts and future RMDs and overall lifetime taxes.
This strategy works best when done gradually and with attention to your marginal tax bracket thresholds. For instance, a couple might aim to convert enough each year to stay within the 22% bracket but not spill into 24%. The goal is to pay a known, manageable tax rate now to avoid being forced into a higher bracket later due to RMDs.
Roth conversions also add flexibility: since Roth accounts don't have RMDs, they can serve as a tax-free reserve for later life or as an inheritance tool for your heirs.
Coordinating RMDs with Other Income Streams
RMDs should be viewed as one piece of a broader income strategy. Depending on your situation, you might:
Time your RMDs later in the year if you expect lower income from other sources.
Coordinate withdrawals across multiple accounts for efficiency (e.g., satisfying your total RMD from one IRA rather than proportionally from each).
Use RMDs to fund spending needs, charitable giving, or reinvest in taxable accounts in a tax-efficient manner.
A Qualified Charitable Distribution (QCD) can be a compelling option if you're charitably inclined. Once you turn 70½, you can donate up to $100,000 per year directly from your IRA to a qualified charity. The amount counts toward your RMD but is excluded from taxable income—helping you lower your adjusted gross income and possibly avoid Medicare and Social Security tax cliffs.
How to Strategize Before RMD Age
Starting in your late 50s or early 60s, it's smart to project your future RMDs under different scenarios. Many retirees discover that delaying withdrawals until 73 can cause their RMDs to balloon—especially if their accounts continue to grow at market rates. This "tax time bomb" can lead to paying higher taxes at a time when you'd rather not.
A few strategies to consider in advance:
Partial Roth Conversions: Gradually shift funds to Roth accounts during low-income years or after retiring before claiming Social Security.
Bridging Income Gaps Strategically: If you're delaying Social Security, consider drawing modest amounts from pre-tax accounts to keep your income steady while reducing future RMDs.
Tax Bracket Management: Use each year's marginal tax bracket as a "budget" for income and conversions. Stay below key thresholds that trigger higher Medicare premiums or Social Security taxation.
Coordinate with Spousal Planning: If you're married, RMD projections should consider both spouses' accounts and expected life spans to manage joint tax exposure.
What Happens if You Don't Need the Money?
Many retirees don't need their full RMD to cover expenses. In that case, you can still put that money to work—reinvest it in a taxable brokerage account, gift it to family, or use it to fund life insurance or charitable vehicles. The key is to plan proactively so the income doesn't accidentally create tax inefficiencies.
The Bottom Line
RMDs aren't just a withdrawal schedule—they're a tax event that can ripple across every part of your financial life. By planning, coordinating withdrawals with your other income sources, and considering strategic Roth conversions before RMD age, you can smooth your taxable income and potentially save thousands in taxes over your lifetime.
Tax laws evolve; the best strategy depends on your broader financial picture, life expectancy, and legacy goals. The sooner you start planning for RMDs, the more control you'll have over how—and when—you pay taxes on your retirement savings.
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.
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The above article was written with the assistance of artificial intelligence (AI).