Saving for retirement is important, and investors can fund various individual retirement accounts (IRA) as savings vehicles.  While Roth IRAs enjoy tax-free growth, other retirement savings accounts (IRAs, 401Ks, etc.) are only tax-deferred. That’s still a good deal, but at a certain point, the deferral benefit ends and the government requires investors to withdraw money from their retirement accounts. At age 70 ½ account owners are required to withdraw a certain percentage of the total value known as Required Minimum Distributions, or “RMDs”.

The IRS considers money withdrawn from these accounts ordinary income, which creates a tax liability for the owner. RMDs exist for a very simple reason: the government wants to collect income taxes on money sheltered in retirement accounts. While you must take RMDs out of your retirement account, you don’t have to spend them. Generally speaking, we recommend that investors spend money in taxable accounts (non IRAs) before withdrawing money from retirement accounts. This is because these savings were already taxed when earned, so withdrawing funds does not create additional tax liability. Many Peloton clients choose to transfer their RMD directly to a taxable or “after-tax” account. We then reinvest the money in a tax-efficient way, as part of their integrated portfolio. Please see the illustration below.

RMD Flowchart

Understanding RMD timing is also important. Technically, IRA withdrawals satisfying RMDs need to occur by April 1 following the RMD year – starting when the owner reaches age 70 ½.  As an example, if your 70th birthday was June 30, 2017 you will turn 70 ½ on December 30, 2017, and be required to take an RMD by April 1, 2018. However, if your 70th birthday fell on July 1, 2017, your first RMD year is 2018 and you have no withdrawal requirement until April 18, 2019. To keep things clean and simple, we advise clients to withdraw each year’s RMD during that calendar year (i.e. by December 31).

RMD percentages also increase as investors grow older. The first year’s RMD begins at slightly less than 4% of the total value of all deferred accounts, and rises each year thereafter. RMD calculations use the value of the account at the beginning of the year (i.e. the value on last December’s statement). Most custodians will calculate RMDs for investors for whom it applies. The IRS also provides a worksheet for investors who need or want to determine their RMD on their own.

Finally, most account custodians allow investors to withhold state and federal income taxes on RMDs.  While it’s always desirable to defer taxes as long as possible, investors also risk penalties for under-withholding. Please consult your tax advisor to determine whether and how much to withhold.

Peloton specializes in structuring and managing custom portfolios for investors who are withdrawing money from their accounts – including RMDs. In many cases we manage the entire RMD process to ensure clients are in compliance with this annual requirement. For more information about how a Peloton custom portfolio would work uniquely for you, please visit, or call (317) 559-1700.