Demystifying Required Minimum Distributions (RMDs) from IRAs

Whether you're a charitably minded individual or a financial planner guiding your clients, understanding how to effectively and purposefully allocate Required Minimum Distributions (RMDs) is imperative to building a legacy.

Head shot of Janelle Woods, a white woman with long, straight blonde hair, smiling and wearing a maroon-colored blouse. — Janelle Woods of CooksonPeirce

“The most common questions I receive from clients around RMDs are usually around navigating the significant tax burden that RMDs can bring,” said , regional managing director at . “Typically, between the age of retirement and the person’s RMD age, clients tend to enjoy lower tax burdens and are often surprised at the amount of tax that their RMD will generate. We simplify guidance for them by running strategic financial goal plans and forecasting lifetime tax brackets to help clients understand their potential future tax liability as early as possible.

“We also plan for tax-effective withdrawal strategies from their portfolios for living expenses, as well as other long term tax favorable moves like charitable giving and Roth conversions. We partner with our clients, guiding them through the many financial decisions they will make following retirement, such as generating a ‘paycheck’ from their portfolio, when to turn on Social Security, portfolio risk and return, charitable giving and legacy planning.”

Below is a breakdown of RMDs, including a definition, how they impact an Individual Retirement Account (IRA), and the surprising ways individuals or advisors can use these distributions to make a meaningful difference — from covering personal expenses to supporting charitable giving.

What Are Required Minimum Distributions (RMDs)?

Required Minimum Distributions, or RMDs, are the minimum amounts that individuals must withdraw annually from their retirement accounts once they reach a certain age. These are mandated by the IRS to ensure taxable income from tax-deferred accounts, such as traditional IRAs, 401(k)s and similar retirement plans.

“The biggest misconceptions about RMDs are around ages you need to take them and whether or not the money needs to be spent,” Woods said. “The government has been tinkering with the RMD age, moving it from 70 ½, to 72, and now to either 73 or 75, depending on the year you were born. This is very confusing, and most people don’t have a good understanding of what the new rules are.”

Woods also mentioned that people are not required by law to spend the funds from their RMDs. “The government doesn’t care what [people] do with the funds; they just need to be removed from the IRA and taxes paid.”

Failing to withdraw the required amount can result in a hefty penalty — formerly set at 50% of the amount not withdrawn but recently lowered to 25% as of 2023, or even 10% under certain circumstances if corrected promptly.

Quick facts about RMDs

RMDs apply to Traditional IRAs, SEP IRAs, SIMPLE IRAs, and employer-sponsored plans, like 401(k)s.
Roth IRAs are exempt from RMDs during the account holder's lifetime.
The amount of your RMD is calculated based on your age, life expectancy and account balance at the end of the previous year.

What Are Qualified Charitable Distributions (QCDs)?

RMDs can be used in different ways. While the IRS requires distribution, you can use your RMD to cover living expenses, reinvest the funds or help grandchildren pay for college, but let’s consider charitable giving through Qualified Charitable Distributions, or QCDs. It’s one of the most impactful — and tax-savvy — ways to use your RMDs.

“Qualified charitable distributions can be incredibly helpful in reducing taxes for those who are charitably minded,” Woods said. “We work with many clients who saved most of their lives in pre-tax retirement plans or IRAs and had expected to be in lower tax brackets in retirement but are finding they are in the same or even higher tax brackets as they age. For our charitably minded clients under the age of 70 ½, we often discuss using a donor-advised fund (DAF) to maximize tax benefits prior to reaching 70 ½ and often pair that planning with other tax moves, such as Roth conversions.”

To do that, firms like Woods’s CooksonPeirce team with our Foundation to ensure your philanthropic vision becomes reality.

“We can continue to assist the clients by continuing to manage the funds in their DAFs at ��ϲʹ�� because the team does such a good job assisting donors realize their goals of helping the ��ϲʹ�� community.”

Additionally, with a QCD, you can donate up to $100,000 annually directly from your IRA to a qualified charity.

QCDs are a perfect example of using finances to enrich both personal and collective journeys.

Other benefits of creating QCDs

The amount donated is excluded from your taxable income, potentially lowering your tax bracket.

QCDs count toward satisfying your RMD requirement.
Maybe most importantly, you can make meaningful contributions to causes that align with your values, fostering a sense of community and compassion.

“People need to be aware of the overall benefits of using their IRAs for charitable giving,” Woods said. “Retirees approaching RMD age are not all aware that they are able to take funds directly from their IRA and give it to charity, and it is completely free of tax. Helping to educate clients about this type of opportunity is something we prioritize in the strategic financial planning process. People should also be aware that even though they are likely not itemizing on their tax returns, they can still benefit from gifting directly from an IRA.

“I’ve run into many people with low income in retirement that didn’t think it made a difference to them whether they wrote a check from their checking account or sent the funds directly from their IRA to their church or favorite charities. They are amazed they can do this.”

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