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RMDs: What They Are, Why They Matter & How to Use Them to Your Advantage

Presented by Retirement GPS: Navigated by Zynergy

What Exactly Are RMDs?

RMDs are the government’s way of ensuring retirement dollars—those dollars you avoided tax on for decades—finally get taxed.

They apply to:

• Traditional IRAs
• 401(k)s
• 403(b)s
• 457 plans
• SEP & SIMPLE IRAs
• Inherited IRAs (with special rules)

Current law requires RMDs to begin at:

• Age 73 (today)
• Age 75 (for those who reach 75 after 2033)

How RMDs Are Calculated

RMDs are calculated using:

1. Your retirement account balance on December 31 of the prior year
2. Your IRS life expectancy factor

For example:

At age 73, the distribution factor translates to about 3.77%.

At age 90, it’s closer to 8.2%.

This means RMDs naturally increase with age—not only because life expectancy shortens, but because your account may continue growing even as you draw from it.

Why RMDs Can Become a Problem

If RMDs push your income higher than expected, several areas are affected:

• Federal tax brackets

Higher taxable income can trigger 22%, 24%, 32%, or 35% brackets unexpectedly.

• Medicare IRMAA

Income above certain thresholds increases your monthly Medicare premiums—sometimes dramatically.

• Social Security taxation

Social Security is taxable up to 85%, and higher RMD income can automatically bump you into that range.

In other words:

When your RMDs grow, you lose control of your tax bracket.

Smart Strategies to Manage Your RMDs

Here are several ways to turn RMDs from a tax burden into a planning opportunity:

1. Use RMDs to Fund Your Lifestyle
   • If you need the income already, your RMD simply becomes part of your cash-flow plan. There’s no extra work—just alignment.

2. Consider Qualified Charitable Distributions (QCDs)
   • If you’re planning on giving to charity, doing so directly from your IRA means:
     • It satisfies your RMD
     • It avoids income tax
     • It does not increase Medicare or Social Security taxation
   • QCDs are one of the most powerful tax breaks retirees have.

3. Take Advantage of Tax Loss Harvesting
   • In market downturns, losses in taxable accounts may offset a portion of the tax impact from RMDs.

4. Automate Your RMDs
   • Missing an RMD can carry a penalty of up to 25% (reduced to 10% if corrected quickly).
   • Automation ensures you never miss a deadline—especially as account structures become more complex.

5. Plan Ahead with Roth Conversions
   • This is the single best long-term RMD strategy.

By gradually converting IRA funds into Roth—even in your 60s before RMD age—you:

• Reduce future RMDs
• Create tax-free retirement income
• Gain control over tax brackets later in life
• Avoid IRMAA spikes
• Build tax diversification

And Roth IRAs have no RMDs at all.

Think of Roth as the treasure chest you get to keep 100% of—no tax bite from the IRS later on.

Common Mistakes to Avoid

• Missing your first RMD deadline
• Taking two RMDs in one year accidentally
• Failing to draw RMDs from every 401(k)
• Assuming Roth IRAs have RMDs (they don’t!)
• Not understanding how RMDs affect IRMAA and Social Security taxation
• Ignoring inherited IRA rules
• Thinking “I’ll never have too much money” and not planning ahead

RMD mistakes are almost always avoidable with awareness and planning.

Action Steps for This Year

1. Confirm your RMD age & due date
   • Make sure your first-year deadlines are crystal clear.

2. Know your projected RMD amount
   • This helps you plan early for taxes and cash flow.

3. Decide your RMD withdrawal schedule
   • Monthly, quarterly, or yearly. Whatever fits your lifestyle.

4. Explore Roth conversions and QCDs
   • They create long-term flexibility and control.

5. Automate your RMDs
   • The easiest way to protect yourself from penalties.