required minimum distributions (RMDs)

Should You Take an Extra Big RMD This Year?

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.

As most IRA investors know, once one reaches age 72, IRS rules require them to take a certain minimum amount from their IRA each year. Many investors do just that — take the minimum — thinking that strategy leaves more assets to grow tax-deferred. But tax changes in recent years are a reason to revisit one’s IRA distribution strategy.

While some folks concerned about paying more in taxes this year than they need to may want stick to the bare minimum of their required minimum distribution (please see A Simple RMD Mistake That Can Cost Retirees Thousands), others looking at a broader tax strategy might want to  consider going big with their RMDs. Let’s look at a couple of examples that illustrate the wisdom of taking more than the required minimum distribution from your IRA.

A Couple Has a Chance to ‘Fill Up’ Their Tax Bracket

Sam and Renee Smith are ages 75 & 71. Sam has an IRA worth $850,000. Their income consists of dividends of $8,000, a pension of $34,000 and a combined Social Security of  $77,000. Bob’s 2021 IRA RMD is $37,118. Using the standard deduction of $28,100 (for a married couple where both people are over the age of 65, plus the $300 charitable contribution deduction), we project taxable income of $116,468, which equals $16,560 federal tax. However, the Smiths could recognize another $64,000 of ordinary income from his IRA before their income goes into the 24% tax bracket.  In 2022 Renee will have to start taking RMDs on her IRA (current value $1.5 million), which would likely bump the Smiths into the 24% tax bracket. 

In this case, we’d recommend Sam Smith take another $64,000 distribution from his IRA this year, filling up the 22% ordinary income tax bracket. Taking the additional distribution from Sam’s IRA should also help reduce his RMD for 2022.

A Man Keeps His High-Earning Beneficiary in Mind

Bill Jones is age 81 and remarried 10 years ago after his first wife passed away. He has an IRA worth $1.3 million and has named his daughter as beneficiary of his IRA. His IRA RMD for this year is $66,000, and he intends to use about $30,000 for qualified charitable distributions (QCDs).

Based on a projection of his 2021 tax return, Bill can take another $22,000 from his IRA, and that income will be taxed at just 12%. Bill’s daughter is age 51 with high earned income and significant assets. We’d advise Bill to “fill up” his 12% marginal ordinary income bracket, as it is likely his daughter will be taxed at a greater rate when she is required to take her beneficiary distributions.   

4 Considerations to Help with Your Own RMD Decision

Key considerations for deciding whether you should take more than the IRA RMD in any year:

  • Your tax bracket. How much additional income can you recognize this year while still staying within your current tax bracket? Taxpayers in the 10% & 12% tax brackets should be especially mindful of maximizing ordinary income in these relatively low tax brackets.
  • Your income. What is your income projected to be next year? Will you (or your spouse) have other sources of income in future years, such as an inherited IRA, spouse’s IRA RMD or annuity income, that should be considered?
  • Your beneficiaries. How does your current tax rate compare with the tax rates of your IRA beneficiaries? If you have a large IRA and children with high incomes of their own, your heirs could be forced into a much higher tax bracket when they commence inherited IRA distributions.
  • Your Medicare premiums. Increases in income can mean higher Medicare Part B & D premiums in coming years, so that should be considered in the context of total savings.

Taking more than the minimum IRA distribution, while counterintuitive, often yields a more favorable long-term result. Be sure to consult with a tax professional for guidance to navigate your specific situation.

About the Author

Mike Palmer, CFP

Managing Principal, Ark Royal Wealth Management

Mike Palmer has over 25 years of experience helping successful people make smart decisions about money. He is a graduate of the University of North Carolina at Chapel Hill and is a CERTIFIED FINANCIAL PLANNER™ professional. Mr. Palmer is a member of several professional organizations, including the National Association of Personal Financial Advisors (NAPFA) and past member of the TIAA-CREF Board of Advisors.

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