You Take What You Need...and You Leave the Rest?

May 19, 2021 By Kristan Anderson, CEBS®, CFP®
Four seniors taking a selfie in the mountains. West Financial Services.

Well, actually that’s not quite how it works. I’m often surprised by how little some clients understand the rules around taking required minimum distributions, or RMDs, from retirement accounts. To be fair, the rules can get pretty dense, pretty quick. But the basic premise is spelled out in the name. These are distributions that, at a minimum, you are required to take every year from assets on which you have previously deferred paying income taxes. To paraphrase that Progressive commercial about becoming your parents, “You don’t need the money? The IRS doesn’t care.” While there are ways to minimize the tax impact, specifically the Qualified Charitable Distribution (QCD), for many clients, RMDs are a necessary evil. But for others, these distributions form the base of income around which planning for cash flow happens. In this article we will discuss some basics for preparing to take RMDs and factors to consider in the process.

As a first step to prepare for taking your RMDs, consider consolidating IRAs and retirement accounts to the extent possible. This will help simplify the administration of distributions and reduce paperwork around tax time. Generally speaking, you will have to take RMDs from any qualified retirement account (think 401k) separately from any IRA assets. If you have multiple IRAs, you may be able to take the consolidated RMD amount from one IRA. Annuities purchased in IRAs are also subject to RMD rules. But you should check to see if your policy is RMD friendly, meaning you may be able to take distributions from other assets, leaving the annuity balance intact. Remember that you do not have to take RMDs from Roth IRAs, but you will have to take them from Roth 401(k) balances left in the qualified plan. This is a good reason to consider rolling out of an employer plan after retirement, and before age 72, the age at which RMDs begin.

Whether you need these distributions or not, what use you have for them, and other considerations form the basis of how you should structure RMD payments. Many of our clients take annual distributions from retirement plans at the end of the calendar year. There are a few benefits to this approach. One is having a little more insight into the balances that will be used for the following years’ distribution. Natalie Choate, noted estate planning lawyer, points out in an article for Morningstar that waiting to take RMDs until later in the year delays quarterly income taxes due, maximizes deferred returns, and allows for other planning to occur, such as in 2020 when RMDs were suspended for the year. Needless to say, this approach works fine if you really don’t need the money to live on.

A discussion on qualified charitable distributions (QCDs) is beyond the scope of this article. But briefly, if you truly don’t need your RMDs and want to lower the tax impact of having to take them, you may consider directly gifting up to $100,000 of your RMD to a qualifying charitable organization (but not a donor-advised fund or charitable remainder trust).

Most people who rely on RMDs, along with social security and pensions, for living expenses will prefer to take their distribution early in the year, or on a regular schedule throughout the year. If you choose the monthly or quarterly payment option, you can have taxes withheld and not have to worry about paying quarterly estimates. This simple approach checks a lot of boxes for people who just want to know what their income will be so that they can live their lives without worrying about money. If something comes up during the year, you always have the option of taking additional amounts out of the account. However, any additional distributions will still be taxed at ordinary income tax rates.

If you have any questions, or would like information on the what, why, and how of RMDs, feel free to reach out to the financial planning team or your relationship manager.

Meet Kristan Anderson, CEBS®, CFP® »

Read the Financial Planning Focus May 2021: 

Choate, Natalie. “How and When to Take Your RMD| Morningstar.” Morningstar, Inc., 14 Apr. 2021, https://www.morningstar.com/articles/1033501/how-and-when-to-take-your- rmd

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