How To Downsize Your RMDs

You must start taking required minimum distributions from your IRA at age 70½. But you can reduce the tax bill.

- Miriam Cross

After you’ve spent decades diverting a healthy stash of cash to your tax-advantaged retirement accounts, you need to start withdrawing a chunk of it each year once you turn 70½. But if you’re fortunate enough to be living comfortably off a pension, Social Security or other savings, the income from your required minimum distribution—and the tax bill that follows—may be more hindrance than help.

Your RMDs are based on the balance in your accounts as of December 31 of the previous year, divided by a life expectancy factor based on your age. Most people use the Uniform Lifetime table, Table III, in Appendix B of IRS Publication 590-B, available at www.irs.gov. The deadline to take your annual RMD is usually December 31, but you have until April 1 of the year after you turn 70½ to take your first required withdrawal. (The Secure Act, currently pending in Congress, would increase the starting age to 72 for RMDs from retirement accounts.) You’ll pay a hefty penalty—50% of the amount you should have withdrawn—if you forgo or delay your RMD past the deadline.