Tax impact of RMDs on retirees’ income

The Internal Revenue Service requires individuals aged 73 and older to take required minimum distributions (RMDs) from their retirement accounts each year. The amount of the RMD depends on the account balance and the account holder’s age. For someone with $250,000 in their retirement account, the RMD would be: $9,433.96 (3.77% of the account balance) at age 73 $10,162.60 (4.06%) at age 75 $12,376.24 (4.95%) at age 80 $15,625.00 (6.25%) at age 85 $20,491.80 (8.20%) at age 90 $39,062.50 (15.63%) at age 100 $125,000.00 (50%) at age 120 or older These distributions are considered ordinary income for tax purposes. This means they could potentially push the account holder into a higher tax bracket, depending on their other sources of income. The IRS provides worksheets to calculate RMDs. Many brokerage firms and IRA custodians also provide the exact account value at the end of the previous year, which is used to determine the required minimum distribution (RMD) amount.

Tax effects of RMD rules

Account holders do not need to take RMDs from each retirement account (IRA). They can combine withdrawals from multiple accounts as long as the total meets the required minimum amount. RMDs must be taken by the end of each calendar year. The only exception is for the first RMD, which can be deferred until April 1 of the following year. It’s worth noting that these rules apply to traditional IRAs and 401(k) plans. Roth IRAs do not have RMDs during the account holder’s lifetime, and distributions from Roth accounts are generally not taxable. Image Credits: Photo by Max Harlynking on Unsplash