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Required Minimum Distributions can raise retirees into higher tax brackets
The IRS requires RMDs to start at age 73 for people born in 1959 or earlier, with amounts based on a life expectancy factor and prior Dec. 31 account balances.
Required minimum distributions are mandatory annual withdrawals from tax-deferred retirement accounts such as traditional IRAs, 401(k)s, and 403(b)s, and they can increase taxable income enough to push retirees into higher tax brackets, according to Yahoo Finance.
The IRS requires RMDs to begin at age 73 for those born in 1959 or earlier, and at age 75 for those born after 1960. The withdrawal amount is calculated each year by dividing the prior Dec. 31 account balance by an IRS life expectancy factor from its distribution period tables.
Yahoo Finance adds that RMDs are treated as ordinary income and are often stacked on top of other earnings in retirement, including Social Security and pension or brokerage income. It also notes that Roth conversions earlier in retirement, during the window before age 73 when taxable income may be lower, can be used to shrink future RMD exposure.
For retirees over 70 and a half, the story also highlights that they can transfer up to $108,000 annually to charity through a QCD, which satisfies an RMD and does not count as taxable income.