The ABCs of RMDs

Required Minimum Distributions, or RMDs, are one of those areas of financial planning that seem simple on the surface but tend to create confusion and costly mistakes in practice. Each year, I work with clients navigating their RMDs, and I am reminded that while the rules themselves are not overly complex, the way they interact with taxes, timing, and overall planning can lead to avoidable issues. The good news is that most of these mistakes are predictable, and with a bit of awareness, they can be avoided entirely.

One of the most common areas of confusion is around the first RMD. Under current rules, your first required distribution must be taken by April 1ˢᵗ of the year following the year you turn 73, and every year after that the deadline is December 31ˢᵗ. On the surface, this seems like a helpful grace period, but it often creates unintended consequences. Delaying that first RMD into the following year means you may end up taking two distributions in the same calendar year, one for the prior year and one for the current year. That can push you into a higher tax bracket, increase Medicare premiums, and create unnecessary tax drag. In many cases, it is actually more efficient to take that first distribution in the year you turn 73 rather than deferring it.

Another mistake I see every year is simply waiting too long. December tends to become a scramble, with clients realizing they still need to take their RMD while custodians, advisors, and clients are all busy with the holidays and other life events. At that point, decisions are often rushed, and distributions may be taken from accounts or positions that do not align with the broader investment strategy. And, while the penalty for missing an RMD has been reduced from 50% to between 10% and 25%, depending on how quickly the mistake is corrected, it is still meaningful and, more importantly, entirely avoidable.

A more thoughtful approach is to build a system around RMDs, whether that means taking them earlier in the year or setting up automatic monthly or quarterly distributions. This approach turns what is often a last-minute task into a controlled and predictable process.

RMDs also tend to be treated as isolated events, when in reality they are a key part of your overall tax picture. An RMD is taxable income, yet I often see distributions taken without any coordination around tax withholding or estimated payments. This can lead to underpayment penalties or an unpleasant surprise when taxes are filed. A better approach is to think of your RMD as part of your annual tax strategy. That might mean withholding taxes directly from the distribution or adjusting estimated payments accordingly, but the key is that it should be intentional rather than reactive.

For those who are charitably inclined, there is also a significant planning opportunity that is often overlooked. Qualified Charitable Distributions (QCDs) allow individuals age 70½ or older to donate directly from their IRA to a qualified charity. These distributions can count toward a Required Minimum Distribution (RMD) while being excluded from taxable income. Despite the potential benefits of this strategy, many people are either unaware of it or remember it too late, after they have already taken their full RMD. When used properly, a QCD can meaningfully reduce taxable income while supporting causes that are important to you, but it requires advance planning and careful execution to ensure the funds go directly from the IRA to the charity. It is also important to be mindful of timing, especially when sending a physical check from an IRA or other retirement account to the charity. Many organizations take time to process and cash physical checks, which can create a confusing paper trail for you and your tax advisor if the check is not deposited until the new year.

Another area where I see missed opportunities is in how the RMD is sourced. If you have multiple IRA accounts, the total RMD is calculated across all of them, but you often have some flexibility in deciding which accounts to withdraw from. Too often, distributions are taken proportionally without considering how that impacts the overall portfolio. In reality, an RMD can be used strategically as part of a rebalancing process, allowing you to trim overweight positions or make adjustments that align with your long-term investment plan. When approached thoughtfully, what is often viewed as simply a requirement, can actually become a useful planning tool.

Finally, there is the mindset issue that comes up frequently, especially for clients who do not need the money. I often hear some version of, “I would rather just leave it where it is.” Unfortunately, that is not an option under the current rules. Whether you need the income or not, the distribution must be taken. The key, then, is to decide what to do with it in a way that supports your broader goals. That might mean reinvesting the after-tax proceeds in a taxable account, using the funds for gifting, or incorporating them into an estate strategy. The distribution itself is mandatory, but what you do with it afterward is entirely within your control.

RMDs are not inherently complicated, but they do require coordination. They touch multiple areas of your financial life, including taxes, investments, and long-term planning. When handled proactively, they can be integrated smoothly into your overall strategy. When handled reactively, they tend to create unnecessary friction. As with most things in financial planning, a little bit of thoughtful preparation can go a long way in turning a requirement into an opportunity.

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