The idea behind Required Minimum Distributions, or RMDs, is that the government wants to give us a tax incentive to save for retirement – but they also want to make sure we don’t misuse it. So, if we’re in the 24% tax bracket and we put money into a tax-deductible IRA or a 401(k), each dollar we put in really only costs us 76 cents because it’s a before-tax contribution. So, the government is helping us save, but the government really wants this to be retirement money. In other words, they don’t want it to be money that you never spend or leave for your heirs. They want to make sure you pay tax on it eventually.
There is an ideal order in which to pull from retirement accounts when taking IRS Required Minimum Distributions (RMD). The goals, which often go unheeded, are to minimize taxes, minimize taking principal, and earn as much as possible. These goals are easy enough to understand, but there are many factors to consider. It takes a well-planned strategy to ensure the interest and dividends you’re generating from your savings and investments are sufficient enough to cover your RMDs, keep your tax bill at a minimum, and satisfy your other expenses throughout retirement.