8 Little-Known Facts About RMDs

Key Takeaways

1. The first rule that people might not know about is that RMDs currently start at age 73, but that age is going to be pushed out even further several years from now.
2. Another one of the lesser-known rules is that people have some leeway when they take their first RMD.
3. People who are still working may be able to delay RMDs.
4. Another lesser-known rule is that people can take RMDs in kind.
5. A misconception is that people think RMDs have a direct impact on their withdrawal rate.
6. Another big misconception is that you need to take an RMD from every holding or every account that you own.
7. There are a few RMD-reduction strategies that investors sometimes overlook; one is a qualified charitable distribution, or QCD.
8. Another RMD-reduction strategy involves purchasing what’s called a qualified longevity annuity contract.

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. Retirees love to hate RMDs, which are the required minimum distributions they must take from their tax-deferred accounts once they pass age 73. Joining me to discuss key rules that you should know about when it comes to RMDs is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning and author of a new book that’s coming out this fall, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement. Christine also hosts The Long View podcast.

Great to see you, Christine.

Christine Benz: Susan, it’s great to see you.

Required Minimum Distribution Age

Dziubinski: Let’s start out with the first rule that people might not know about when it comes to RMDs, and that’s that they currently start at age 73, but that age is going to be pushed out even further several years from now. So, tell us about that.

Benz: Right. The age is set to go up to 75 actually in 2033. We went from 70-and-a-half to 72 to 73—75 and 2033. That means that people who were born in 1960 or after will be able to take their RMDs after age 75.

The Required Beginning Date for RMDs

Dziubinski: OK. So, a little bit later. That’s probably good news to a lot of people. Now another one of the lesser-known rules is that people do have some leeway about when they take their first RMD. Delve into that.

Benz: Right. There’s what’s called a required beginning date. And this is actually April 1 of the year after the year in which you turn 73. So, an example, say, I turn 73 in 2024. I would have until April 1, 2025, to take that first RMD. The tricky part about it is that April 1 RMD would be for 2024. I’d have to take another one by year-end 2025 to account for my 2025 RMDs. This is one reason why when you talk to tax advisors, financial advisors, they don’t often recommend this strategy because you’re doubling up and you’ll have a big tax bill in that year when you actually have to take those two RMDs together.

Can Required Minimum Distributions Be Delayed?

Dziubinski: Got it. Christine, you say that people who are still working may be able to delay RMDs. Tell us about that.

Benz: Right. If you have IRAs, you still have to take those RMDs from those accounts. But if you’re still working and you have some sort of a company-provided plan, a 401(k) plan, for example, even if you are of RMD age and you’re not an owner of more than 5% of that company that you’re employed by, you can delay RMDs on that particular account. So, it’s a strategy to investigate for people who are still working. This is an increasing cohort in our population. And it’s something to investigate. You may even actually be able to roll in assets from an IRA into that company-provided plan. Whether you’re able to do so depends on the plan. So, do some checking on that. But that’s another RMD-mitigation strategy.

In-Kind RMDs

Dziubinski: You note that another lesser-known rule is that people can take RMDs in kind. When might that be a strategy that makes sense?

Benz: This is mainly a bear-market strategy in my opinion, but there are a couple of benefits to consider doing so. The big one is if you think the securities are undervalued and you want to hang on to them and you want to maintain consistent exposure to them without any slippage where you would maybe pull them from the IRA and then you want to rebuy them for the taxable account, the in-kind RMD does allow you to maintain that consistent market exposure to those securities. And then there’s another potential tax benefit. Say the securities have shriveled in value, maybe we’re in a down market or those securities in particular have had a bad run, but you want to hang on to them, the benefit is that if you pull them out in line with your RMDs, you’re effectively getting the securities out with a relatively low tax bill attached to them. So, then you move them to a taxable account. When you eventually sell them, you’ll pay taxes at the capital gains rate on that appreciation. So, if they appreciate a lot after you move them to a taxable account, you’re the winner because you’re paying taxes on that appreciation at your capital gains rate.

Do RMDs Have a Minimum Required Withdrawal?

Dziubinski: Well, that’s interesting. Let’s talk a little bit about a couple of misconceptions when it comes to RMDs. The first being that people think they have a direct impact on their withdrawal rate. They don’t, right?

Benz: Right. So, invariably when I talk about safe withdrawal rates, I handle shoot up and say, what about RMDs? Because if you look at those tables and you calculate them, you see that as you age, they quickly move over the level that someone might consider sustainable or comfortable. Well, I always say they’re not required minimum spending; they’re required minimum distributions. So, there’s no reason if your RMD is taking you over your withdrawal level that you find comfortable, you should reinvest elsewhere in your portfolio. For most people, that will be a taxable brokerage account, but they may be able to get the funds in an IRA even if they have earned income. So, it’s not a mandatory spending. It’s a mandatory distribution.

Do Required Minimum Distributions Have to Be Taken From All Accounts?

Dziubinski: Another big misconception is that you need to take an RMD from every holding or every account that you own. Expand on that.

Benz: This is something I like to talk about around kind of year-end when people take their RMDs. Be strategic about where you go for your RMDs. As long as you take the right amount from the accounts that are subject to RMDs, it doesn’t matter where you go for them. So, you could go to all one account. You could go to all one holding within one account. A great example would be for investors right now, their US equity holdings, especially their US large-growth holdings, have had a tremendous run. Consider peeling back just from those US equity holdings. Leave the other stuff intact. You can really actually improve your portfolio along the way with taking your RMDs.

RMD-Reduction Strategies and Qualified Charitable Distributions

Dziubinski: Christine, you say there are a few RMD-reduction strategies that investors sometimes overlook. Tell us about them.

Benz: Right. One that I’m happy to see is getting more popular is what’s called a qualified charitable distribution, or QCD. This enables you to take a portion of your tax-deferred account and steer it to the charity of your choice. And the good news about QCD is that it is not going to count toward your taxable income. Any amount that you do send a charity via the QCD is not going to count toward taxable income. And it also helps you reduce your RMD-subject balance. And you can start the QCD at age 70-and-a-half versus 73 when RMDs start. So, it presents a nice little window there for investors to reduce their RMD-subject balances before those RMDs actually come online. So, get some tax advice, but this can be a terrific strategy for charitably inclined retirees really at all income levels. You don’t need to be a high roller to take advantage of it.

Who Should Consider Qualified Longevity Annuity Contracts?

Dziubinski: Lastly, you say another strategy involves purchasing what’s called a qualified longevity annuity contract. What is it and who should consider it?

Benz: Right. Here’s another spot to get some good quality advice, objective advice. But this is a type of deferred annuity where you can steer up to $200,000 of your IRA into this deferred annuity. And that amount that you’ve moved into the annuity will not be subject to required minimum distributions. So, it can be a nice RMD-reduction strategy. It’s something to explore for people who are concerned about outliving their assets and want to have their income potentially protected later in life. So, it’s something to consider and a way to potentially reduce the amount of your RMD-subject balance.

Dziubinski: Well, Christine, thanks for your time today. RMDs are important to a lot of people, and it’s important to really understand everything that goes into them. We appreciate your time.

Benz: Thank you so much, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch Should Your Simple Retirement Portfolio Be More Complicated? for more from Christine Benz.