Whether you’re about to begin enjoying the benefits of your years of saving for retirement or just starting to contribute to a retirement plan, you’ll want to know a few things about required minimum distributions (RMDs).
Essentially, RMDs are how the federal government recovers a portion of the taxes you avoid over the years as you contribute to a tax-deferred plan such as a 401(k) or IRA. RMDs officially start at age 73 (The SECURE Act of 2022 raised the age from 72). That’s when you are required to start taking money out of your tax-deferred plan and pay tax on those distributions. You must take your first RMD by April 1 of the year following the year you reach age 73.
One of the advantages of a tax-deferred plan is that you are likely to be in a lower tax bracket after you retire, so the tax you pay on your RMDs will be less than what you would have paid on those earnings when you were working. Of course, that isn’t always the case. When it comes to earnings and taxes, everyone is unique. While the IRS rules for RMDs generally apply to all taxpayers, they also allow for some creative ways to lessen the impact of, or even eliminate, the tax consequences.
A few basic facts about RMDs:
Now, let’s look at a couple of situations where the rules encourage some smart tax planning strategies:
RMDs can be substantial depending on how much you have in tax-deferred savings. But there are nuances associated with the laws governing RMDs that provide options on how you want to take them. Whether you’re already retired, approaching retirement, or just beginning to save for retirement, talk with your financial advisor about how to maximize your retirement savings in a way that best accommodates your financial circumstances and objectives.
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