RMDs Explained: What Savers Should Know Before Retirement

Most people in their 30s, 40s, and 50s focus on how to grow their wealth and invest, not on the rules governing retirement withdrawals decades down the road. Required Minimum Distributions (RMDs) can feel like a distant concern. But RMDs are a topic that people should know about early in their financial adulthood. Why? Because if you’re a dedicated saver, there’s a chance you’ll wind up with too much of your money in tax-deferred accounts like IRAs and 401(k)s.

Why should you care? The answer is balance. If you save exclusively in a 401(k), you may find yourself in retirement with little or no flexibility. On the other hand, spreading savings between tax-deferred accounts, Roth accounts, HSAs, and taxable brokerage accounts can give you options later and options can be powerful when it comes to managing taxes.

What Is a Required Minimum Distribution (RMD)?

RMD stands for Required Minimum Distribution. An RMD is the minimum amount of money you are required to withdraw each year from certain retirement accounts once you reach a specific age (73 in 2026, and rising to 75 for younger generations). You are required to withdraw RMDs whether you need it or not. 

RMDs are calculated by dividing your account balance by a life expectancy factor set by the IRS. There are lots of RMD calculators online, like the AARP RMD Calculator, that can help estimate future withdrawals. If you play with these calculators, you quickly learn that even modest retirement accounts can require meaningful annual withdrawals and those withdrawals are taxed as ordinary income, potentially increasing your tax bill and affecting other areas of your financial life. 

How RMDs Can Push You Into a Higher Tax Bracket

RMDs that increase your taxable income significantly pushing you into a higher tax bracket, is known as “bracket creep.” This can in turn impact how Social Security benefits are taxed, Medicare premiums, pension, and eligibility for some tax deductions or credits. Unfortunately, bracket creep is a common experience and something that can require careful planning. 

This is often the point where people realize their income picture is more complex than expected, and proactive planning with an financial planner can help identify ways to smooth income and help reduce the potential for avoidable tax surprises.

Hidden Costs of RMDs: Taxes, Medicare, and Investment Income

Higher RMDs don’t just affect income taxes. They can also:

• Increase how much of your Social Security benefits are taxable
• Push your Medicare premiums higher
• Cause more of your investment income to be taxed at unfavorable rates

That’s why RMDs aren’t just a “retirement-age problem” they’re a financial planning problem you want to think about much earlier.

When Do RMDs Start? What Rules You Should Know

There are some basic rules and information about RMDs that many Americans don’t know until they reach retirement age. 

The age at which you have to start taking RMDs keeps changing. Ten years ago, in 2016, the RMD age was 70½. Now, in 2026, the age is 73, and it will increase to 75 in 2033. Of course, you can take money out of your retirement accounts any time after you are 59½, but the RMD doesn’t kick in until you are 73. The years between 60 and 73 can be good years to consider using strategies to reduce your future RMDs (more on this later).

After you take your first RMD, you must take them annually after that. If you don’t, the IRS charges hefty penalties for failing to do so, up to 25% of the amount you should have withdrawn. Fortunately, the IRS also lets you request a waiver if you ever forget or take too little, but you don’t want to count on that more than once.

How RMDs Work for Inherited IRAs

Inherited IRAs (and other tax-deferred accounts) have their own set of rules, which can be surprisingly complex. The SECURE 2.0 Act, passed in 2022, made these rules even trickier. Your RMD strategy will depend on the type of account (traditional vs. Roth), your relationship to the original owner (spouse, child, other beneficiary), and whether the original owner had already started taking RMDs

For example:

• Spouses who inherit IRAs have the most flexibility. They can roll the IRA into their own or treat it as an inherited account.
• Non-spouse heirs usually must withdraw the entire account within 10 years, unless they qualify for exceptions (such as being disabled or less than 10 years younger than the original owner).
• If the account passes to a trust, the rules can be even more complicated.

Because mistakes with inherited IRAs can lead to big tax bills and penalties, it can be helpful to consult a financial advisor or CPA, especially if the inherited account is larger than $150,000.

How to Balance Contributions While You’re Working

Before closing in on retirement age, many folks have competing goals: saving for retirement, paying for a home or kids’ education, maybe even enjoying life in the present. So how can you prioritize your savings? 

Here’s a practical framework to consider that balances tax benefits today with flexibility tomorrow:

1. Take Advantage of Your Employer Match (Free Money).
   If you can afford to, contribute at least enough to your 401(k) to get the full employer match. Skipping this is like turning down a guaranteed raise.
2. Max Out Your HSA (If Available).
   HSAs are often called the “triple-tax-advantaged account”: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses (including most monthly Medicare payments) are tax-free. If you can afford to pay current medical costs out of pocket, you can let your HSA grow as a future retirement account.
3. Contribute to Roth Accounts (When Eligible).

If your employer offers a Roth 401(k), consider splitting contributions between Roth and pre-tax. If your income is too high for a direct Roth IRA, ask your advisor about a “backdoor Roth IRA.” Roth contributions give you tax-free money later, which creates flexibility when RMDs kick in.

1. Continue Funding Your 401(k) or Other Pre-Tax Plan.
   For high-earning W-2 employees, maxing out the 401(k) often makes sense for the immediate tax savings. Just remember that this can lead to large RMDs later, so balancing with Roth or taxable savings is important.
2. Build a Taxable Brokerage Account.
   Contributions here don’t reduce your taxes today, but they offer the most control later on. You decide when to sell, gains may qualify for lower capital gains rates, and there are no RMDs. Taxable accounts also provide liquidity for mid-career goals (home, education, sabbatical, business investment), and the higher spending that usually occurs in the first 10 years of retirement.

RMD Planning for High-Income Earners

If most of your compensation is W-2 income, you’ll probably end up with the bulk of your wealth in tax-deferred accounts simply because the limits are higher there. That’s okay, it’s often the most tax-efficient move while you’re in peak earning years. The important part is to intentionally direct some savings into Roth or taxable accounts, even if the amounts are smaller. Over decades, those dollars can make a big difference in your flexibility.

Strategies to Reduce or Manage RMDs

Even if most of your savings end up in tax-deferred accounts, there are financial planning tools that can help manage or reduce RMDs:

• Working after age 73 (or 75 in the future):
  If you’re still employed and don’t own more than 5% of the company, you can delay RMDs from your current employer’s 401(k). (This exception doesn’t apply to old 401(k)s or IRAs.)
• Roth Conversions:
  The years between retirement and age 73 are often a “tax sweet spot.” With no salary and before RMDs begin, your income may fall into a lower bracket. Strategically converting portions of a traditional IRA or 401(k) to a Roth lets you pay taxes at today’s lower rates and reduces future RMDs. Roth IRAs have no lifetime RMDs, so this creates long-term flexibility.
• Strategic Withdrawals Before RMD Age:
  If you retire before RMD age, and even if you have sufficient taxable or Roth savings to cover your expenses, you can consider drawing from your traditional IRA or 401(k) earlier than required. While it may feel counterintuitive, these withdrawals can “shrink” your future RMDs and allow you to recognize income in years when you’re in a lower bracket. This strategy can also help reduce the tax impact on your Social Security and Medicare premiums once RMDs begin. You can combine this option with Roth conversions by making sure the total taxable income stays within the 24% bracket.
• Tax-efficient withdrawal strategies:
  Coordinating withdrawals across taxable, Roth, and tax-deferred accounts in a planned sequence can minimize bracket creep and reduce lifetime taxes. For example, you might spend down taxable accounts first, convert traditional IRAs to Roth in low-income years, and delay Social Security until age 70 for higher income later.

These strategies often work best when coordinated years in advance, which is why investors may choose to begin discussing them with an advisor well before retirement is on the immediate horizon.

Why Early RMD Planning Matters

For high-earning professionals in their prime working years, RMDs may feel far away, but they’re worth thinking about now. By balancing contributions across account types and knowing the strategies available later in life, you can help reduce future tax headaches and keep more control over your money in retirement.

In short: don’t let RMDs sneak up on you. Many times, people only begin thinking about withdrawal strategy once retirement arrives, but earlier guidance can help turn future constraints into intentional choices. With the right mix of financial planning, both while you’re working and in the years before RMDs begin, you can help create flexibility, reduce taxes, and help make your retirement income work on your terms.

When to Consider Professional Guidance

RMD planning is rarely just about taking a required withdrawal. For many people, this stage of life is when retirement starts to feel more real and more complicated than expected. 

Withdrawals can influence your tax bracket, the taxation of your Social Security benefits, Medicare premiums, and how efficiently your savings support you over time. And even if retirement still feels far away, the saving and contribution choices you make during your working years play a major role in how flexible or restrictive those future decisions become.

Whether you’re actively building wealth or beginning to draw from it, it’s natural to wonder if you’re striking the right balance. Should more savings go into pre-tax accounts or Roth? Are today’s tax savings creating future tax challenges? Is there a smarter way to coordinate withdrawals, conversions, and long-term income planning? These questions tend to surface at different stages of life, but they all point to the same goal: making sure your money continues working efficiently as your life evolves.

Working with a financial advisor can help bring clarity to those decisions not just when RMDs begin, but years or even decades beforehand. Thoughtful planning can help you stay proactive instead of reactive, aligning saving, investing, and withdrawal strategies into a coordinated plan over time. The benefit isn’t only potential tax savings; it’s the confidence that comes from knowing your financial decisions today are supporting both your future flexibility and the retirement you’re working toward.