If you have money saved in a Traditional IRA or an old 401(k), you've probably heard of something called a Required Minimum Distribution, or RMD. While many people know they have to take money out eventually, there is much more to understand. Making smart decisions about your RMDs can help lower taxes, support your retirement goals, and even leave more money for your family.¹²

An RMD is the minimum amount the IRS requires you to withdraw each year from certain retirement accounts. These rules exist because the money in those accounts has often never been taxed. The government eventually wants to collect its share.¹²

For most people today, RMDs begin the year they turn 73. If you were born in 1960 or later, your RMD age is scheduled to increase to 75 under current law.²

The Hidden Cost of RMD Mistakes

Many retirees think they should wait until the last minute to take their RMD each year. That is not always the best choice. Waiting until December means you could miss opportunities to spread out your tax withholding or use the money throughout the year. Taking monthly or quarterly withdrawals can make budgeting easier and reduce the stress of a large year-end distribution.¹

Another common mistake is taking only the required amount without thinking about taxes. Your RMD counts as ordinary taxable income. A larger withdrawal could move you into a higher tax bracket or increase the amount of your Social Security benefits that are taxed. It may even increase your Medicare Part B and Part D premiums two years later because of the Income-Related Monthly Adjustment Amount (IRMAA).³⁴

Where an Unneeded RMD Could Go

Some retirees do not actually need the money from their RMD to pay their bills. If that is the case, there are still smart ways to use it. You might reinvest the money in a taxable investment account, use it to help children or grandchildren, or build a larger emergency fund. Although you cannot put the money back into your IRA, it can still continue working toward your long-term financial goals.¹

If you are charitably minded, a Qualified Charitable Distribution (QCD) may be worth considering. Beginning at age 70½, you can give money directly from your IRA to qualified charities. If done correctly, the donation can count toward your RMD while keeping that amount out of your taxable income. For many retirees, this can be more tax-efficient than taking the RMD first and then writing a check to a charity.⁵

Roth Conversions and the Still-Working Exception: What to Know

Another planning opportunity happens before RMDs begin. If you retire early or have a few years with lower taxable income, you may benefit from making partial Roth IRA conversions before age 73. Although you pay taxes on the converted amount today, future qualified Roth withdrawals are generally tax-free and are not subject to RMDs during your lifetime. This strategy is not right for everyone, but it may reduce future taxes and provide greater flexibility in retirement.²⁶

If you are still working after age 73 and participate in your current employer's retirement plan, you may be able to delay RMDs from that employer's 401(k) if the plan allows it and you do not own more than 5% of the company. However, this exception does not apply to Traditional IRAs, which generally still require RMDs once you reach the applicable age.²

RMDs and New Jersey State Taxes

For New Jersey residents, there is some good news. New Jersey generally does not tax distributions that represent contributions you already paid New Jersey income tax on while you were working. Depending on your situation, a portion of your retirement account withdrawals may be excluded from New Jersey income tax. In addition, many retirees qualify for New Jersey's Retirement Income Exclusion if they meet age and income requirements. These rules can reduce your state tax bill, but they are separate from your federal tax rules.⁷⁸

New Jersey retirees should also remember that higher taxable income may affect eligibility for certain state property tax relief programs, including ANCHOR, Senior Freeze, and Stay NJ, each of which has its own income rules and qualifications. Planning your withdrawals carefully may help you maximize the benefits available to you.⁹

Looking at RMDs Through a Bigger-Picture

One of the biggest mistakes retirees make is treating RMDs as nothing more than a yearly chore. Instead, think of your RMD as part of your overall retirement income plan. Looking at taxes, charitable giving, investment planning, Medicare premiums, and state benefits together can often lead to better long-term outcomes.¹³⁴⁵⁷

Nick Noto

Nick Noto is a lifelong resident of Millstone, New Jersey. He is a graduate of Rider University's Business Honors Program, where he earned a bachelor's degree in Finance with a concentration in Private Wealth Management. Nick began his career at Merrill Lynch as a National Financial Solutions Advisor, where he obtained his SIE, Series 7, and Series 66 securities licenses and gained two years of experience in the financial and client advisory services industry. During this time, he earned the Accredited Asset Management Specialist (AAMS®) designation and is currently pursuing the Certified Financial Planner™ (CFP®) certification. At Millstone Financial Group, Nick supports the advisory team in a variety of operational and client service capacities, including new account processing, money movement requests, client relationship support, and marketing event coordination. Outside of the office, Nick enjoys spending time with his family, playing golf, snowboarding, and following professional sports.

For decades, the traditional retirement age has hovered around 65, and the IRS generally imposes a 10% penalty on withdrawals from tax-advantaged retirement accounts before age 59½. However, many Americans are choosing to leave the workforce much earlier— whether at age 55, 50, or even younger. Fortunately, the tax code provides several legal ways to access retirement savings before age 59½ without paying the early withdrawal penalty. Two of the most valuable strategies are the 72(t) Substantially Equal Periodic Payment (SEPP) rule and the Rule of 55.

Strategy 1: The 72(t) Rule (SEPP) — Accessing an IRA Before Age 59½

Normally, withdrawing money from a traditional IRA before age 59½ results in ordinary income taxes plus a 10% early withdrawal penalty. Section 72(t) of the Internal Revenue Code provides an exception by allowing investors to establish a series of Substantially Equal Periodic Payments (SEPPs). When structured correctly, these distributions avoid the 10% penalty, although the withdrawals remain subject to ordinary income tax.¹

How It Works
The IRS allows three approved methods to calculate annual withdrawals:

• Required Minimum Distribution (RMD) Method – Annual payments are based on the account balance and IRS life expectancy tables. Because the calculation is updated each year, this generally produces the smallest annual withdrawals.
• Fixed Amortization Method – The account balance is amortized over life expectancy using an IRS-approved interest rate, producing a fixed annual payment that typically results in the highest withdrawal amount.
• Fixed Annuitization Method – Uses IRS mortality tables to calculate a fixed annual payment, generally resulting in withdrawals slightly lower than the amortization method.²

Once a SEPP plan begins, strict rules apply. Payments must continue for five years or until you reach age 59½, whichever is longer. For example, someone beginning a SEPP at age 52 must continue distributions until age 59½, while someone starting at age 57 must continue until age 62.³

The IRS also requires that the payment schedule remain unchanged. Skipping a payment, taking an extra withdrawal, or modifying the plan generally results in a retroactive assessment of the 10% early withdrawal penalty plus interest on all prior distributions.⁴

Many retirees establish a separate IRA specifically for the SEPP program, leaving the remainder of their retirement savings untouched and available for future flexibility.⁵

Who Should Consider a 72(t) Strategy?
A 72(t) strategy may be appropriate for individuals who:

• Have accumulated significant IRA assets.
• Have permanently retired before age 59½.
• Need retirement income before becoming eligible for Social Security or pension benefits.
• Can commit to the required payment schedule without interruption.

Strategy 2: The Rule of 55 — Early Access to Your 401(k)

For workers whose retirement savings remain in their current employer's 401(k) or 403(b), the Rule of 55 often provides a simpler and more flexible alternative.

If you separate from your employer during or after the calendar year in which you turn 55, you may withdraw money directly from that employer's retirement plan without paying the 10% early withdrawal penalty. Ordinary income taxes still apply, but unlike a SEPP, there is no required withdrawal schedule. You may withdraw as much or as little as needed.⁶

Important Limitations
The Rule of 55 only applies to the retirement plan sponsored by the employer from whom you separated. Money held in Traditional IRAs, Roth IRAs, or 401(k) plans from previous employers does not qualify for this exception.

Additionally, if you roll your current employer's 401(k) into an IRA before taking distributions, you generally lose the Rule of 55 benefit and would instead need to rely on another exception such as a 72(t) SEPP.

Public safety employees— including police officers, firefighters, and emergency medical personnel participating in governmental retirement plans— may qualify beginning at age 50 under similar IRS provisions.

Comparing the Two Strategies

Eligible Account — Rule of 55: Current employer's 401(k) or 403(b). 72(t) SEPP: Traditional IRA (or eligible retirement account).
Earliest Age — Rule of 55: 55 (50 for qualifying public safety employees). 72(t) SEPP: Any age.
Withdrawal Flexibility — Rule of 55: Withdraw any amount at any time. 72(t) SEPP: Fixed payment schedule.
Required Commitment — Rule of 55: None. 72(t) SEPP: Five years or until age 59½, whichever is longer.
Risk of Penalty — Rule of 55: Low if rules are followed. 72(t) SEPP: Significant if payment schedule is modified.

Choosing the Right Strategy

Both of these IRS provisions are designed to help individuals bridge the gap between early retirement and age 59½, but each serves a different purpose.

The 72(t) SEPP offers access to IRA assets at virtually any age but requires long-term commitment and careful planning. Even minor mistakes can result in substantial penalties.

The Rule of 55 provides much greater flexibility for employees retiring at age 55 or later, allowing withdrawals as needed without committing to a fixed schedule. However, it applies only to the retirement plan sponsored by the employer from whom you most recently separated.

Determining the right strategy depends on your age, account types, tax situation, retirement income needs, and long-term financial objectives.

Donald Albach

Don has worked in the financial services industry for his entire professional career. Throughout every phase of Don's career, he has focused on retirement planning. Don's role at Millstone Financial Group is to work with clients to create Retirement Income Planning strategies that help guide them towards financial peace of mind. Don graduated from Norwich University, "the nation's oldest private military college," in 1986, then joined First Boston's International Investment Group before spending 11 years at MetLife working with employer group 401(k) plans. In 2012, Don separated from MetLife and established Millstone Financial Group. Don currently lives in Monroe Township, NJ with his wife, Tina, whom he has been married to since 1992. They have three children together, Paige, Donny, and Ally. Don's two passions are sailing and watching college football. He also enjoys cooking Sunday dinner for his family.

Many people spend decades saving for retirement, contributing to their 401(k), IRA, or other investment accounts with the hope that everything will work out when they finally stop working. But accumulating assets is only one piece of the puzzle.

The real question is: Are you truly aware of your financial situation, or are you simply hoping you're on the right track?

Many retirees and those approaching retirement know how much they've saved, but they don't know whether their investments are working efficiently, how much they're paying in fees, when they should claim Social Security, or what taxes their family may face in the future. In other words, they may have a retirement plan, but they don't have a complete understanding of it.

At Millstone Financial Group, we believe that knowledge leads to confidence. That's why we offer our Millstone Awareness Analysis, a no-cost financial review designed to provide clarity and help you make more informed retirement decisions.

Our Awareness Analysis focuses on five key areas that can have a significant impact on your financial future.

1) Portfolio Analysis

Your investment portfolio should reflect your goals, time horizon, and tolerance for risk. We evaluate whether your investments are appropriately allocated and determine whether your portfolio may be overexposed to market risk, underperforming relative to appropriate benchmarks, concentrated in certain sectors or investments, or misaligned with your retirement objectives. Many investors are surprised to discover that their portfolios no longer match the level of risk they intended to take.

2) Investment Fee Analysis

Fees matter more than most investors realize. Even small annual fees can reduce long-term retirement savings over time through the effects of compounding. Our investment fee analysis identifies advisory fees, mutual fund expense ratios, hidden investment costs, and the overall cost of managing your investments. Understanding what you're paying allows you to determine whether you're receiving appropriate value for those costs.

3) Retirement Income Projection

Saving for retirement is important, but understanding how to turn those savings into reliable income is equally critical. Our retirement income projection illustrates what retirement may look like by estimating potential retirement income, how long your assets may last, whether your current savings can support your desired lifestyle, and areas where adjustments may improve your long-term outlook. This analysis helps answer one of retirement's biggest questions: Will my money last as long as I do?

4) Social Security Optimization

For many retirees, Social Security represents one of the largest guaranteed income sources they will receive. Claiming benefits too early, or waiting too long, can significantly affect your lifetime income. Our Social Security analysis evaluates your individual circumstances to help determine the optimal time to begin benefits based on factors such as your retirement goals, life expectancy considerations, spousal benefits, and coordination with other retirement income sources. Making an informed claiming decision can increase lifetime retirement income for many households.

5) IRA and 401(k) Tax Liability Analysis

One of the most overlooked aspects of retirement planning is taxes. Many people assume that leaving their traditional IRA or 401(k) to their children is the most efficient estate planning strategy. However, inherited pre-tax retirement accounts may create significant income tax consequences for beneficiaries under current tax law. Our analysis examines the potential tax liability associated with traditional IRAs and 401(k)s, whether your current distribution strategy is tax-efficient, opportunities to reduce future taxes, and strategies that may help preserve more of your wealth for your heirs. The goal is to help you understand not only what you have accumulated, but what your family may ultimately keep.

Awareness Creates Confidence

Retirement planning isn't simply about growing your assets. It's about understanding how all the pieces fit together. A comprehensive review can help answer important questions such as: Am I invested appropriately? Am I paying too much in fees? Will my retirement income meet my needs? When should I claim Social Security? What taxes could my family face in the future? Are there opportunities to improve my overall retirement strategy? The answers may reveal opportunities you never even knew existed.

Schedule Your Millstone Awareness Analysis

Whether you are preparing to retire in the next few years or you have already retired, understanding your complete financial picture can help you make more informed decisions. The Millstone Awareness Analysis is a complimentary, no-obligation review designed to provide insight into your retirement readiness. While every situation is unique, our goal is simple: to help you gain greater awareness of where you stand today and identify opportunities that may strengthen your financial future.

Donald Albach

Don has worked in the financial services industry for his entire professional career. Throughout every phase of Don's career, he has focused on retirement planning. Don's role at Millstone Financial Group is to work with clients to create Retirement Income Planning strategies that help guide them towards financial peace of mind. Don graduated from Norwich University, "the nation's oldest private military college," in 1986, then joined First Boston's International Investment Group before spending 11 years at MetLife working with employer group 401(k) plans. In 2012, Don separated from MetLife and established Millstone Financial Group. Don currently lives in Monroe Township, NJ with his wife, Tina, whom he has been married to since 1992. They have three children together, Paige, Donny, and Ally. Don's two passions are sailing and watching college football. He also enjoys cooking Sunday dinner for his family.