When should you prepare for Required Minimum Distributions (RMDs)?

By Jeff Gill

Let’s talk about something most of us don’t think about until it’s breathing down our necks—Required Minimum Distributions (RMDs). I know, not exactly a party topic, but if you’ve got a retirement account like a 401(k) or IRA, you have to deal with them. Don’t worry, I’ll break it down in plain, human speak.

First Off, What Even Are RMDs?

Okay, here’s the deal: The IRS lets you save money in certain retirement accounts tax-free (or tax-deferred) for years. But at some point, Uncle Sam wants his cut. That’s where RMDs come in. Once you hit a certain age (we’ll get to that), the government requires you to take out a minimum amount from your retirement accounts each year. And yes, you pay taxes on it.

Think of it like the IRS saying, “Hey, we’ve been really patient. Time to cough up some cash.”

So, When Should You Start Thinking About RMDs?

Short answer? Way before you actually have to take them. The age for starting RMDs used to be 70½ (weird, I know), but now it’s 73 for most people, thanks to new rules. If you’re younger, by the time you hit that age, the rules might shift again. So, keep an eye on it.

But here’s the thing—don’t wait until 73 to plan for them. Preparing early can save you a lot of headaches (and money).

Why Plan Early?

Imagine this: You hit 73, and suddenly you realize your RMD is bigger than you expected. Now you’re withdrawing a chunk of money you don’t even need, bumping yourself into a higher tax bracket. Fun, right?

Planning ahead means you can ease into it. Maybe start withdrawing smaller amounts earlier to spread out the tax hit. Or explore other strategies, like converting some of your traditional IRA funds to a Roth IRA, which doesn’t have RMDs.

Real Talk: How to Prepare

Know What You’ve Got
Start by taking stock of all your retirement accounts. IRAs, 401(k)s, maybe even that old 403(b) you forgot about. Each one has its own RMD rules, so get organized.
Do the Math
The IRS has a formula to calculate your RMD based on your account balance and life expectancy (fun, right?). Don’t worry—you don’t have to do this yourself. Most financial institutions calculate it for you.
Plan for the Taxes
Remember, RMDs count as taxable income. If you’re not careful, they could push you into a higher bracket. A financial advisor or tax pro can help you figure out how to manage this.
Consider Starting Early
If you’re in your 60s and your accounts are growing like crazy, it might make sense to take small withdrawals now, even if you don’t need to. You’ll pay taxes, but it could lower your RMDs later.

The Penalty for Forgetting

Oh, and here’s a fun fact: If you miss your RMD deadline, the IRS slaps you with a penalty of up to 25% of the amount you were supposed to withdraw. Yes, twenty-five percent. So, yeah, don’t forget.

Final Thoughts

RMDs aren’t the most thrilling part of retirement, but they’re manageable if you prepare. The key is to start thinking about them early—like, in your 60s. That way, you can avoid surprises and keep more of your money in your pocket (and out of Uncle Sam’s).

So, take a deep breath, get organized, and maybe talk to a financial advisor if you’re feeling stuck. Future-you will be glad you did.

Now, back to the fun stuff—like planning how to actually enjoy your retirement!