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Do pre-tax withdrawals from my IRA and/or 401(k) accounts made before I turned 73 count toward my RMDs? Or do RMDs start at 73 regardless of previous withdrawals? I am now 70 and still working and receiving Social Security, but plan to retire in 2024.
– Luis
Unfortunately, withdrawals from an IRA or 401(k) before age 73 do not count toward any required minimum distributions (RMDs). However, you may still be able to reduce your RMDs if that is your goal.
Do you need extra help planning RMDs or managing your tax liability in retirement? Talk to a financial advisor today.
Purpose of RMDs
RMDs are designed to force you to withdraw money from tax-deferred retirement accounts so that the money can be taxed and prevent the tax-deferred income from growing indefinitely. Understanding that this is the explicit purpose of RMDs can help you put these mandatory withdrawals into context as you plan around them.
In other words, if you’re worried that RMDs will disrupt your distribution plan and increase your bill, then that’s the point. Of course, RMDs won’t affect everyone. Some people will have to withdraw more than the minimum amount to cover their living costs.
As you mentioned in your question, RMDs now start at age 73. The RMD age, which was previously 70.5 and then 72, has increased to 73 under the SECURE 2.0 Act. The age will rise again in 2033, rising to 75 years for people who turn 74 after December 31, 2032. (If you’re preparing for RMDs, consider discussing your strategy with a financial advisor.)
Calculate RMDs
The RMD calculation process is quite simple, both in concept and application. The idea is that RMDs spread your benefits out over your life expectancy, so that there is no remaining balance in your account when you die.
To calculate your mandatory benefit, simply divide your account balance as of December 31 of the previous year by the life expectancy factor corresponding to your age. You can find this in one of the many IRS life expectancy tables. You then withdraw that amount from your account(s) annually.
To illustrate how this works, let’s assume that someone will be 78 years old in 2024. Because he/she is married to someone no more than 10 years younger than him/her, our hypothetical retiree would consult Table III (Uniform Lifespan) and see that their life expectancy factor is 22.
Since it is 2024, this person needs the account balance as of December 31, 2023. Let’s assume this is $500,000. They would then simply divide $500,000 by 22 and get an RMD of $22,727. This is the amount our hypothetical retiree would have to withdraw during 2024. They will repeat this calculation the following year with their new account balance and updated life expectancy factor.
If you have more than one IRA, you must calculate the RMD for each account separately. However, when it comes time to withdraw the money, you can take the entire distribution from one account if you wish. This is known as the IRA aggregation rule. (But if you need help calculating or managing your RMDs, consider consulting a financial advisor.)
How to Reduce RMDs
There are no magic tricks here. To reduce your RMD, you must reduce your account balance beginning December 31 of each year.
Roth conversions are a useful tool for this. Converting pre-tax assets into after-tax Roth assets requires you to pay income taxes on the money now in exchange for tax-free growth in the future. And since both Roth IRAs and Roth 401(k)s are not subject to RMDs, conversions help reduce the size of your pre-tax account balance, on which RMDs are based.
For example, if our hypothetical retiree in the example above were to convert $50,000 of his $500,000 balance before December 31, 2023, his RMD would be based on an account balance of $450,000. This would lower their RMD to $20,454.
Does this mean you need to do Roth conversions? Not necessarily. You still need to evaluate your entire savings, tax, and financial situation to make sure it makes sense within the entirety of your financial plan. However, RMD planning is one piece of that puzzle.
Two things I think are worth highlighting here:
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Be aware of conversion taxes. This is about lowering your RMDs in the future, rather than lowering your current tax bill. If you make a Roth conversion, your tax liability will likely increase for the year you complete it.
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Your conversion will not count towards last year’s RMD. Referring back to our original example, if the person does a Roth conversion in 2024, they will still need to withdraw $22,727 to meet their 2023 RMD.
Do you have any questions about retirement planning? Consider a match with a financial advisor today.
Next steps
RMDs are intended to withdraw account balances and generate tax revenue for the IRS. By design, there’s not much you can do to get around them. However, if you plan for multiple years at a time, Roth conversions can help you reduce the balance on which your RMD is based.
If you don’t need your RMDs to cover living expenses, you may want to have a plan for what you’ll do with that money once you withdraw it and pay taxes on it. If you are charity conscious, then a qualified charitable distribution (QCD) may also be something you want to consider.
Retirement planning tips
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Retirement planning can be complex – from calculating RMDs to managing your tax liability – but a financial advisor can help you with this process. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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SmartAsset’s retirement calculator can help you estimate how much money you need to save to afford the lifestyle you want in retirement. This free tool can also help you track whether you’re on track to reach your savings goal.
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Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and provides marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform, nor an employee of SmartAsset, and has received compensation for this article. Questions may be edited for clarity or length.
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