RMDs and tax-efficient withdrawal strategies

What that means is that you generally want to look at all of your retirement income together, rather than treating your RMD as a separate decision.

An RMD is simply the minimum amount the IRS requires you to take out of certain retirement accounts each year. That withdrawal is generally taxable, although there can be exceptions, such as if part of the account contains money you already paid tax on.

The planning opportunity is in deciding where the rest of your spending money should come from. For example, if your RMD already puts you near the top of a tax bracket, it may make sense to take additional spending money from a Roth account or from a taxable investment account with little or no gain, rather than taking even more from a traditional IRA.

The opposite can also be true. In some years, it may make sense to intentionally withdraw more than the RMD if you are in a relatively low tax bracket and want to reduce the size of your IRA for future years. You are allowed to take more than your RMD, although the extra amount does not count toward a future year’s RMD.

Other factors can matter too, including Social Security taxation, capital gains, Medicare premiums, state taxes, and what you expect your tax situation to look like in future years. Higher income can also increase Medicare Part B and Part D premiums through IRMAA.

So in plain English, “tax-efficient withdrawal planning” means deciding which accounts to take money from, how much to take, and when to take it in an effort to manage taxes over your retirement, rather than simply minimizing taxes in one particular year.

Everyone’s circumstances are different, and we do not know all of the details of your situation. Consider reviewing your withdrawal strategy with a fee-only fiduciary financial advisor and tax professional who can evaluate what makes sense based on your personal needs and overall financial picture.