I'm Starting IRA Withdrawals at Age 65. Will They Count Toward My RMDs Later?

Withdrawals from an IRA that start before required minimum distributions (RMDs) are due can reduce the amount of your future RMDs, although not on a dollar-by-dollar basis. RMDs are calculated based on the balance in your retirement account, not on previous withdrawals. However, by reducing the balance in your account, early withdrawals can reduce the calculated amount of your future RMDs. Another strategy to reduce or even eliminate RMDs is to convert all or part of your IRA to a Roth IRA.

A financial advisor can help you calculate your future RMDs and plan for how to manage them.

Walking Through RMD Management

There are many tradeoffs to consider when planning an RMD strategy. There are unknowns at play regarding market returns, and interwoven tax implications for many routes.

For example, if you are 65, in most cases you’ll be subject to RMDs in eight years, after you turn 73. Assuming you have a $500,000 IRA account now, you could withdraw $50,000 per year for the next eight years. And assuming a 7% annual return on investments made in your IRA, your account would have about $272,871 after you reach age 73. At that point, based on the IRS tables, your first-year RMD would be $10,297.

Now let’s consider how this would reduce your RMDs compared to not taking any early withdrawals. In eight years, at a 7% average annual return, the $500,000 balance in your IRA would have grown to $859,093, according to SmartAsset’s Investment Return and Growth Calculator. Based on that balance, your first-year RMD would be approximately $32,418.

In each case, you’ll have to weigh the tax obligations, which will depend on your other taxable income sources, to determine what suits your current needs and future goals best.

Understanding Required Minimum Distribution Fundamentals

Pre-tax retirement savings accounts like your individual retirement account (IRA) let you defer the need to pay taxes on funds you contribute to the account until a later date. However, these taxes are not completely avoided, only delayed. When you withdraw money later on, the withdrawals are taxed as ordinary income.

You can’t just leave the money in the IRA to grow tax-free forever, due to required minimum distribution (RMD) rules. These rules require you to withdraw a specified amount of money each year after you reach a certain age, usually 73. The amount of the RMD is calculated each year based on your age and the amount in your account. The IRS publishes tables you can use to calculate the amount of your required RMD. For instance, if you are 73, you can figure out the RMD by dividing the balance in your account by 26.5.

Retirement savers who are concerned about paying income taxes in retirement may employ strategies to avoid or reduce RMDs. That’s because the RMDs are treated as ordinary income and, if they’re large enough, can cause your total taxable retirement income to increase so much that it pushes you into a higher marginal income tax bracket.

IRA to Roth IRA Conversion

One way to manage RMDs is to convert all or part of the money in your IRA into a Roth IRA. A Roth conversion strategy avoids RMDs, because these accounts are not subject to RMD rules. Future withdrawals from the Roth account are also tax-free, when done according to the rules. That means they won’t cause your Social Security payments to be taxed, among other potential benefits.

Funds converted from an IRA to a Roth are immediately taxed as ordinary income, however, so this can result in a sizable current tax bill. Generally, a Roth conversion makes the best sense when you expect to be in a higher tax bracket after you retire. It may also be a smart move if you plan to leave retirement fund assets to your heirs, as Roth assets can be passed on tax-free.

Early Withdrawals

Early withdrawals are an easier and somewhat less effective way to manage RMDs. You can, by withdrawing from your IRA before your RMDs begin, reduce the amount in your IRA. If you do that, future RMDs will be calculated on the smaller amount and so will be smaller, as well.

A financial advisor can help you create a plan for taking your RMDs that aligns with your personal financial situation.

What is your current age?

Over 65

61 - 65

56 - 60

46 - 55

36 - 45

Under 35

This survey will match you with vetted fiduciary financial advisors. We provide your advisor matches with your survey responses, which help them understand your financial goals. Your advisor matches are chosen based on your location and/or desire to work with remote advisors, as well as your stated amount of assets. We also consider each advisor's advertising budget, therefore advisors with larger budgets are more likely to appear in the results page. All advisors must meet the same vetting criteria.

Fine-Tuning RMD Strategies

As shown in the example, you can potentially reduce your RMD by about $22,121 by beginning withdrawals before RMDs are due. Bear in mind, however, that you’ll owe taxes on withdrawals as ordinary income. A $50,000 IRA withdrawal will increase your income and may raise you to a higher marginal tax bracket.

For instance, if you have $100,000 in annual taxable income now and file single, you’re likely in the 22% marginal bracket and owe about $13,841 in federal income tax. Adding $50,000 in taxable income will move you into the 24% bracket and produce a tax bill of $37,013.

If you were to choose the Roth conversion route, you may be able to reduce or manage the tax bill by gradually converting IRA funds to the Roth over several years. If you converted $50,000 each year, it would have the same effect on your current tax bill, but the money would still be able to grow tax-free in the Roth account. Of course, you can only follow this strategy if you don’t need the retirement fund withdrawals to pay for current living expenses, and you can adjust withdrawal amounts to suit a strategy that fits your needs.

Consider matching with a fiduciary financial advisor to speak about your personal situation.

Bottom Line

Starting IRA withdrawals early can potentially reduce future RMDs, but only indirectly. Anything you do to reduce the balance in your IRA will reduce RMDs, which are calculated based on your age and account size. Taking regular sizable withdrawals starting at age 65 could reduce your IRA balance enough to make a significant difference in future RMD amounts. However, you’ll owe taxes on withdrawals as ordinary income now. You may also want to look into a Roth conversion as another way to manage RMDs.

Retirement Planning Tips

Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Estimating your future Social Security benefit is a basic part of retirement planning. Do it now, quickly and easily, with SmartAsset’s Social Security Calculator.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.