What Happens if I Take a Bigger RMD?

“Sometimes only taking the minimum IRA distribution can be a costly mistake. When deciding how much to withdraw this year, you need to consider the big picture. For some people, it makes sense to go big.”

Once you celebrate your 72nd birthday, the IRS requires you to take a minimum amount from IRAs or other tax-deferred retirement accounts. Most people take the minimum, says a recent article from Kiplinger titled “Should You Take an Extra Big RMD This Year?” However, taking the minimum is not always the right strategy.

Looking at the broader picture might lead you to go bigger with your RMDs. For example, Bill and Betty are ages 75 and 71. Bill has an IRA worth $850,000. Their retirement income consists of a pension totaling $34,000, dividends of $8,000 and combined Social Security benefits of $77,000. Bob’s 2021 IRA RMD is $37,118. Using the standard deduction of $28,100 (for a married couple where both are over age 65 plus a $300 charitable contribution deduction), their taxable income is $116,468. Federal taxes are $16,560.

Bill and Betty could recognize another $65,000 of ordinary income from his IRA before they land in the 24% tax bracket. In 2022, Betty will have to start taking RMDs on her IRA—did we mention that her IRA is worth $1.5 million?—which will bump them into the 24% tax bracket. Bill should take another $64,000 from his IRA, filing up the 22% ordinary income bracket and reducing his RMD for 2022.

Another example: Alan Smithers is 81 and remarried ten years after his first wife passed. His IRA is worth $1.3 million, and his daughter is the beneficiary. His IRA RMD is $66,000 and he intends to be generous with charity this year, using about $30,000 for a Qualified Charitable Distribution (QCS). Based on a projection of his 2021 tax return, Alan could take another $22,000 from his IRA, taxable at 12%. His daughter Daphne is 51, has a high income and significant assets. He should consider filling up his own 12% marginal ordinary income bracket, because when Daphne starts taking her own beneficiary distributions, she’ll be facing high taxes.

Here’s what you need to consider when making RMD decisions:

Your tax bracket. How much more income can you realize while staying within your current tax bracket? Taxpayers in the 10-12% brackets should be extra careful of maxing out on ordinary income.

Your income. What does 2022 look like for your income? Will there be other sources of income, such as an inherited IRA, spouse’s IRA RMD, or annuity income to be considered?

Beneficiaries. How does your own tax rate compare with the tax rates of your beneficiaries? If you have a large IRA and your children have high incomes, could an inheritance push them into a higher tax bracket?

Medicare Premiums. Increases in income can lead to higher Medicare Part B and D premiums in coming years, so also keep that in mind.

It’s best to take the broader view when planning for RMDs and taxes. A short-sighted approach could end up being more costly for you and your heirs.

Reference: Kiplinger (Nov. 23, 2021) “Should You Take an Extra Big RMD This Year?”