How Do Required Minimum Distributions and QCDs Work?

Today we’re going to discuss two main, important aspects when trying to secure your retirement: RMDs and QCDs. But before we go any further, it’s important to define these acronyms for you:

  • RMDs: Required minimum distributions
  • QCDs: Qualified charitable distributions

It’s important to understand how required minimum distributions and qualified charitable distributions work, even if you’re under 72. We’re going to discuss a strategy that is crucial to you, even before you can begin taking your RMDs.

So, if you’re under 72 and don’t think this post is for you, trust us: it is.

Understanding Required Minimum Distributions

RMDs are attached to your 401(k), traditional IRA and other retirement accounts that are out there. If you have an account where you defer taxes until the future, the IRS requires you to take money out of these accounts and pay your taxes.

When you place money into these accounts, the deal is, “I don’t want to pay taxes now, but I will later.”

At age 72, you’re required to begin taking RMDs out of these retirement accounts, using a formula that is based on your life expectancy. These figures are generalized, and right now, at age 72, you have a life expectancy of 27.4 more years.

Using your balance from December 31 of the year prior to taking the distribution, you would do the following:

  • Balance / 27.4 = RMD

For example, let’s assume that your IRA had a balance of $500,000 on December 31, 2021. When you take the distribution in 2022, you’ll receive $500,000/27.4 = $18,248.18. However, you may not need to take your distribution at 72.

When you turn 72, you’re required to take a distribution for the year. So, for example, if your birthday is in November, you’ll still take the distribution in January of that year.

However, on your first RMD, you can decide to take the RMD in the next calendar year by April 1.

Delaying Your First RMD Until April 1

If you want to delay your first RMD, normally for tax reasons, there are some pros and cons that go along with it. For example, let’s assume that you must take an RMD in 2022, but because you turn 72 this year, you decide to take your first RMD by April 1, 2023.

In the 2023 calendar year, you’ll take two RMDs of:

  • approximately $18,248.18
  • approximately $18,248.18

After this period, all RMDs must be taken by December 31 of the calendar year.

You can also withhold taxes from your RMDs, so you won’t need to worry about:

  • Quarterly payments
  • Surprise tax bills

However, it’s up to you to decide whether you want to pay taxes quarterly or not. You can also opt to take a monthly distribution from your account. The main goal is to take out the full amount required by the end of the year.

Custodians of your account will take care of the calculations on your RMD amount, so we suggest following the amount they recommend for distributions.

If you’re 65 and retired, you can still take money out of your account for:

  • Living expenses
  • Placing funds into a Roth account
  • Lowering your future RMDs

When clients opt for this strategy, they can grow the money in their Roth accounts tax-free, which is very beneficial.

Sometimes, people have five different IRA accounts with $100,000. You can take the RMD from a single account. The IRS doesn’t care as long as you take the money out of the account. However, if you have a 401(K) and 4 IRAs, you need to take the portion out of the 401(K) and then the remaining from your IRA.

When retirement planning and trying to secure your retirement, you’ll find a lot of buzz around RMDs and QCDs.


Let’s find out.

Understanding Qualified Charitable Distribution

QCDs are another tool that you can use in retirement planning, and it’s one that the IRS allows you to begin using at 70 ½. If you want to give money to a charity that qualifies for a QCD, you can donate a portion or all of the RMD to the QCD.

Many people will take the RMD, pay taxes, and then give the money to charity.

However, with a QCD, you can:

  • Skip paying taxes
  • Setup a QCD directly to the charity

Since the check goes directly to the charity, you’re erasing the taxes on the distribution and helping a charity with the full amount of the RMD.

You can begin using the QCD strategy at the age of 70 ½ and above.

If you’re interested in QCDs and RMDs but have more questions, we’re more than happy to help. You can schedule a call with us.

We also have two great courses that you can sign up for today for free: 4 Steps to Secure Your Retirement and 3 Keys to Secure Your Retirement Master Class.