Once a year, the IRS tells retirees with traditional IRAs and 401(k)s the smallest amount they must withdraw. A surprising number of them hear it as the largest amount they are allowed to spend. Unfortunately, some do not hear anything.

A recent Vanguard survey of retirement account holders found that 44 percent of those who planned to take only their required minimum distribution misunderstood what the distribution is for. Twenty-nine percent believed the RMD was the government’s recommendation for a safe withdrawal amount, and 15 percent did not know they could take more. The IRS does not share that view. Its own guidance says plainly that anyone may withdraw more than the minimum. The government sets a floor. It has never offered to set a budget, which is probably for the best.

The habit is not new. J.P. Morgan Asset Management and the Employee Benefit Research Institute followed about 31,000 households as they entered retirement between 2013 and 2018. Most had not touched their retirement accounts before withdrawals became mandatory, and roughly 84 percent of those who had reached RMD age took only the minimum. It is possible that folks who have saved have a spending problem; they don’t do it.

What the distribution is for

A traditional IRA or 401(k) is a deal with the government. The money went in untaxed and grew untaxed, sometimes for forty years. The tax was deferred, not forgiven, and the required minimum distribution is how the IRS finally collects it. The rule exists to empty the account on Washington’s schedule. Nobody designed it to tell a retiree how much he or she can afford to spend.

The formula makes that plain. Each year’s distribution is the prior December 31 balance divided by a factor from the IRS Uniform Lifetime Table. At 73 the factor is 26.5, which works out to about 3.8 percent of the account. At 80 the required withdrawal is 5.0 percent, at 85 about 6.3 percent, and at 90 about 8.2 percent. The percentage climbs every year. Remember that the account annual gains can very well be exceed what is required to come out.

Most retirees spend the other way. The J.P. Morgan and EBRI research found that spending tends to be highest in the early, active years of retirement and to decline with age. A withdrawal plan built on the RMD therefore holds spending down in the years with the most time and health to enjoy it, then forces money out in the years when travel has given way to the recliner. The same research concluded that the RMD approach can leave a sizable balance at age 100. Heirs may appreciate the gesture. The retiree who skipped the trip to see the grandchildren at 74 probably did not intend to make it.

A paycheck that moves with the market

Many retirees treat the RMD as a paycheck: the required amount arrives, and that amount gets spent. A paycheck based on last year’s closing market value is not a dependable one. After the market fell in 2022, many December 31 balances were lower, and the 2023 distributions dropped with them. RMD’s highlight sequence of returns risk in IRA’s and 401(k)’s. Retirees who had been living on the RMD saw their “income” cut, and some concluded they could no longer afford their usual spending, even though nothing prevented them from withdrawing more.

The opposite misunderstanding is just as common. Some retirees believe that because the money came out, it has to be spent. It does not. A required distribution cannot be rolled back into an IRA, and the income tax on it is owed either way, but whatever remains after tax can be reinvested in an ordinary brokerage or savings account. The IRS requires the money to leave the IRA. It does not require the money to leave the household.

Start before the government starts you

The best time to plan withdrawals is years before the first RMD is due. Required distributions begin at 73 for anyone born from 1951 through 1959, and at 75 for anyone born in 1960 or later. For someone who stops working in his or her early or mid sixties, that leaves a long stretch, often a decade or more, in which the paycheck has stopped, Social Security may not have started, and no withdrawal is required.

Those are usually the lowest-income years a retiree will have, which makes them the cheapest years to take money out of a traditional account. A dollar withdrawn or converted at 12 percent at age 66 is a dollar that will not be forced out later, stacked on top of Social Security, at 22 or 24 percent.

The question is whether you would rather start using the money on your own terms or wait for the IRS to set them. Many retirees choose the second option without realizing they made a choice at all. Some reach their fifth year of retirement without ever having felt comfortable spending a dollar from the IRA they spent thirty years building.

Make the portfolio feel like income

Disciplined savers will spend a Social Security check without hesitation and treat the IRA as untouchable. The difference is psychological, but it is real, and researchers have measured it. David Blanchett and Michael Finke, research fellows at the Retirement Income Institute, found that retirees spend about 80 percent of their lifetime income, such as Social Security and pensions, but only about half of what they could safely spend from savings. Their earlier study found that retirees whose assets produce annuitized income spend roughly twice as much as retirees with an equal amount of non-annuitized savings.

The practical lesson is to turn savings into something that looks and feels like a paycheck. One approach is a fixed monthly transfer from the IRA to checking, set at a sustainable level, with guardrails written in advance for when to raise it and when to trim it after a bad year. Another is to convert part of the savings into guaranteed lifetime income through an annuity, so that a portion of the portfolio arrives on the same schedule as Social Security and gets spent the same way. Each approach has trade-offs, and some income sources can change from year to year. A combination often works best. The goal is a withdrawal plan you will follow, not one that looks elegant in a spreadsheet and never gets used.

My recommendation is to decide how much you need to live on first, and then decide which accounts it should come from. The RMD belongs in that plan as a minimum the plan has to clear. It should never be the plan itself.

The tax bill that grows while you wait

Taking only the minimum feels conservative. For taxes, it is often the riskier choice. Every dollar left in a traditional account keeps growing, and the larger balance produces larger required distributions later, when Social Security is fully underway. For a married couple, a surviving spouse will eventually face those same distributions at single-filer tax rates.

Financial planners often do not want to predict, but I will – federal tax rates will go up and probably a lot. Why? Math. They must. We are currently in historically low rates and federal debt is growing at a historically high rate, and in real terms. And now a required disclaimer that my prediction is for general education and not a definitive tax or legal guarantee.

A required distribution is ordinary income, and it moves several other numbers with it. It can push income into a higher bracket. It can raise the tax rate on capital gains and qualified dividends, because those rates depend on total taxable income. It can make up to 85 percent of Social Security benefits taxable. Two years later, it can trigger an IRMAA surcharge on Medicare Part B and Part D premiums.

Money in a traditional IRA will be taxed eventually, either to the owner or to the people who inherit it. Under current rules, most beneficiaries other than a spouse must empty an inherited IRA within ten years, often during their own peak earning years. Paying some of the tax now, at a known and moderate rate, can leave the family more after taxes. The answer depends on today’s bracket compared with the bracket later, and it is not right for everyone. Either way, it deserves a calculation.

Using the gap years

The years between retirement and the first RMD are where most of the planning value sits, and the main tool is the Roth conversion. A conversion moves money from a traditional IRA to a Roth IRA, and the amount moved is taxed as income in the year of the move. Roth IRAs have no required distributions during the owner’s lifetime, and qualified withdrawals are tax-free, so every dollar converted is a dollar that will never appear in an RMD.

Robert and Susan Whitfield, a fictional couple, show how it works. Robert plans to retire at 67 and delay Social Security until 70, so the couple’s income stays low until required distributions begin at 73, which gives them six clear years. Between Robert’s IRA and Susan’s old 401(k), they hold about $1.4 million that has never been taxed. Their plan is to convert a measured amount each year, up to the top of the 24 percent bracket, and to pay the tax from their brokerage account so the full converted amount lands in the Roth. Every dollar they move shrinks the December 31 balance that future distributions are calculated on, along with the bracket, the Social Security taxation, and the Medicare surcharges that follow from it.

The same idea works at a smaller scale. A couple whose taxable income sits low in the 12 percent bracket during the early retirement years can often convert enough to reach the top of that bracket, $100,800 of taxable income for a married couple in 2026, and pay 12 percent on dollars that might otherwise come out at 22 percent later.

Conversions raise income, so each year’s amount should be sized with the IRMAA thresholds, Social Security taxation, and the following year’s plans in view. A conversion that saves $3,000 in income tax and adds $4,000 in Medicare premiums is not a bargain.

Small rules, expensive mistakes

A few rules cause more trouble than their size suggests.

The first RMD can be delayed until April 1 of the year after you reach RMD age, but the second is still due by December 31 of that same year. Delaying the first one puts two distributions in a single tax year. Waiting makes sense mainly when income in the year you reach RMD age is unusually high.

Required distributions from traditional IRAs are calculated for each account, but the total can be taken from any one IRA or any combination. Workplace plans are stricter. Each 401(k) must satisfy its own distribution. Confirm which accounts can be combined before moving any money.

If you give to charity and are 70½ or older, a qualified charitable distribution sends money directly from an IRA to a qualifying charity. It counts toward the RMD and never enters taxable income. The limit for 2026 is $111,000 per person. The money must go from the custodian straight to the charity, not to you first, and a donor-advised fund does not qualify.

Tax withheld from an IRA distribution is treated as though it were paid evenly throughout the year. A retiree can take one distribution in December, withhold enough to cover the year’s taxes, and skip quarterly estimated payments entirely.

Finally, do not miss it. Vanguard found that 6.7 percent of its IRA investors who were required to take a distribution in 2024 took none. The average missed distribution was about $11,600. At the 25 percent excise tax, or 10 percent if the shortfall is corrected within two years, that is a penalty of roughly $1,160 to $2,900, on top of the income tax still owed. Missing once also tends to become a habit: 55 percent of those who missed one year missed the next. An automatic annual distribution set up with the account custodian ends the problem.

The floor is not the ceiling

The required minimum distribution answers one narrow question: how much tax-deferred money must leave the account this year. It does not tell you how much you can afford to spend or when you should start. Those answers come from an income plan, ideally built years before the first RMD and reviewed every year after. A retirement income advisor can run the projection that shows how withdrawals, conversions, Social Security, and Medicare premiums affect one another.

The government will collect its tax either way. It does not care whether you enjoyed the money first.

About the author

Jeff Batson, MBA, RFC®, is a retirement income advisor with Goat Planning in Staunton, Virginia, serving clients in 20 states. A Navy veteran, he is the author of Don’t Run Out: A Practical Guide to Social Security, Medicare, and Tax-Smart Retirement Income. Learn more at goatplanning.com.

This article is for educational purposes only and is not legal, tax, or financial advice. It draws on sources believed to be reliable, and any opinions are not predictive of future events. Please consult a qualified professional about your own situation. This content has not been reviewed by FINRA.