By Patrick Meyer
Some days it feels like there are only two kinds of people in the world: those already taking Required Minimum Distributions—and those who will be before they know it.
Here at American Trust Wealth, we are winding down Required Minimum Distribution (RMD) season for 2025, with just enough breathing space to begin again in January. With many of our clients approaching retirement milestones, we have more individuals hitting the RMD age of 73 each year. With the passing of the SECURE Act of 2019, more folks who inherit IRAs are also subject to RMDs as the law generally requires full distribution of inherited IRAs to the beneficiaries within 10 years of the decedent-owner’s death. As such, there’s a good chance you (or someone you know) are navigating this annual rite of distribution.
You can read to your heart’s content all about the intricacies of IRA RMDs in IRS Publication 590-B. If you are still not satiated and have a company-sponsored retirement plan or annuity, you can dive into IRS Publication 575, which addresses employer plan RMDs. Here’s the bottom line, when you reach a certain age, or if a certain condition arises, the IRS requires you to take a distribution of a certain portion from an IRA or qualified retirement account. The IRS provides a formula for calculating the distribution amount, and in most cases, the distribution amount is fully taxable as ordinary income. (Roth IRA RMDs – which occur after the original owner has passed — are the primary exception to the taxability rule; if all eligibility requirements are met, distributions from a Roth IRA are not subject to income tax.)
Let’s shift away from the technicalities for a moment and consider a few practicalities we often see. Once a client knows the amount of the RMD, the next questions are usually:
- What do I do with the distribution amount?
- When should I take the distribution?
What do I do with an RMD?
In simple terms, spend it, save it or give it away. The majority of RMD recipients are at a stage of life where the distribution amount is used to meet regular household spending throughout the year. For retirees especially, Social Security, RMDs and investment income (like dividends and interest) are the foundation for secure retirement income. Some households are blessed to have income streams above and beyond their spending needs. In those cases, the RMD proceeds may wind up being re-invested back into an investment account (after taking care of the taxes owed on the distribution) where they can continue to grow over time. And finally, we see an increasing number of households use their RMDs to pursue charitable goals. A common strategy for RMDs is to make a Qualified Charitable Distribution – wherein the retirement account custodian (American Trust Wealth in this example) sends all or a portion of the client’s RMD directly to a designated 501(c)(3) charitable organization on the client’s behalf. Qualified Charitable Distributions are only available to those who are 70 ½ years old or older. The IRS imposes a limit on the amount of the Qualified Charitable Distribution; $108,000 for 2025 and $115,000 for 2026. Qualified Charitable Distributions are advantageous in that the amount given to charity is not recognized as taxable income. However, as a corollary, the amount given to the charity may not be recorded as a charitable deduction when filing a tax return.
When should I take my RMD?
If you are subject to an RMD you may take the distribution from your qualified account anytime throughout the year, but don’t procrastinate; failure to fully satisfy an RMD may subject you to a tax penalty of 25% of the amount that was not taken.
For those who need the RMD to meet regular household spending, we encourage them to set up an orderly withdrawal pattern, like a monthly withdrawal, to even out the annual distribution and provide a regular stream of income. Let’s illustrate with simple math. Assume Sally must take $60,000 from her IRA in 2025 to meet her RMD. Sally instructs American Trust Wealth to withdraw a gross amount of $5,000 ($60,000 divided by 12) every month, and to have us withhold $800 in federal taxes and $200 in state taxes, and then remit to her checking account the balance, or $4,000 on the 15th of every month. When the final distribution is made in December, we will have withheld $9,600 in federal taxes (or 16%), $2,400 in state taxes (or 4%) for the year, and sent $48,000 directly to Sally’s checking account.
For those not needing the RMD to meet household spending needs in such a predictable pattern, consider making ad hoc withdrawals when a specific obligation arises. For example, Charlie pays his property taxes in October and pays his annual country club dues in November. In early October, Charlie instructs American Trust Wealth to satisfy his RMD, withhold some portion for taxes, and remit the balance to his checking account. Charlie now has funds on hand and ready for his upcoming expenses.
Clients who typically end up saving the bulk of their RMD generally prefer to push the distribution to the latter part of the year, allowing the account (with the RMD intact) to continue to grow on a tax-deferred basis. This is an effective strategy, however, we caution clients that “open season on unmet RMDs” starts in earnest in October, so be prepared to receive a series of reminder calls and emails from a Fiduciary Investment Advisor. The firm’s informal policy is to have all RMDs satisfied by the end of November each year so that we may devote more attention to year-end planning, tax-loss harvesting and other pressing investment matters throughout December.
We encourage those who prefer to make Qualified Charitable Distributions of all or a portion of their RMD to arrange such distributions early in the year. We often need to collect information about the charity to expedite the distribution and to ensure the client gets proper credit for the donation since the funds are coming from the custodian and not the client. Having a little extra time to accomplish these tasks helps to ensure complete satisfaction. Something else to think about here … your charitable contribution may garner a little more attention and appreciation if it arrives in June instead of December.
If you are the beneficiary of an inherited IRA subject to the 10-year distribution rule, the notion of RMDs may still be new and confusing to you. We understand and are here to help. One important thing to recognize with respect to RMD calculations for inherited IRAs is that the annual RMD amount (as calculated according to IRS tables) will generally be far less than what may otherwise be recommended to avoid a looming tax problem as the 10-year deadline gets closer. Let’s illustrate, again, with simple math. Assume Sophie is the beneficiary of an inherited IRA that is subject to the 10-year distribution rule, per the SECURE Act of 2019. The inherited IRA is valued at $100,000. Assume Sophie’s first year RMD, based on IRS tables, is $4,000. Sophie is concerned that if she withdraws only the amount of the RMD each year, which would likely be approximately $4,000 per year, she will still have a rather large remaining balance in the inherited IRA when year 10 arrives. In such case, Sophie is concerned that she will have a large spike in taxable income in year 10, pushing her into a higher marginal tax bracket and resulting in higher taxes. To alleviate her concerns about the spike in income and taxes in the latter years of the distribution period, Sophie decides to take $10,000 ($100,000 divided by 10) out of her inherited IRA in the first year of the 10-year distribution period. Sophie concludes this is a better withdrawal strategy for her to follow (e.g., remaining inherited IRA balance divided by remaining number of years) to spread both the income and the taxes more evenly over the 10-year time frame.
While this discussion is not intended to be fully exhaustive on all things RMD, we hope it provides some general rules and planning ideas to help you work through your RMD anxiety. Be sure to consult with your Fiduciary Investment Advisor on ways to make the most out of your RMDs.