Creating Retirement Income: From RMDs to SWRs

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A reader recently asked the following question about retirement withdrawals:

retirement withdrawals

I am approaching 72, and for the life of me I do not know the difference between setting a safe withdrawal rate (SWR) and how that relates to my required minimum distributions (RMD). Perhaps you can write a post someday that will explain the relationship between the two. A simplistic question I have is this: what if my RMDs exceed my desired SWR?

I often throw around financial terms (and abbreviations and acronyms) and forget how confusing these concepts can be. So I appreciate questions that show me what readers are struggling with and whether I’m simplifying financial topics for readers or adding to the confusion.

Getting Clear on Retirement Withdrawal Terminology

SWRs and RMDs are both abbreviations for terms related to taking money from retirement accounts. That is about all they have in common. I’ll first briefly define each term and then we can explore each in more depth and the relationship between them.

A RMD is the amount you must withdraw from certain tax-advantaged retirement accounts. The IRS mandates that you distribute the money from these tax-deferred investment accounts, creating a taxable event for the account holder in the year you withdraw the money.

You don’t have to spend your RMD. You can reinvest the proceeds into a taxable account that is not subject to RMDs.

SWR research is concerned with determining the amount you can withdraw from your entire retirement portfolio without exhausting it before you die. You ultimately must determine this amount. No one can tell you with certainty what it is.

SWRs are concerned with meeting spending needs without running out of money. This information is also helpful to help determine how much money you need to retire comfortably and confidently.

What is a Required Minimum Distribution (RMD)?

RMD is a term defined by the IRS as the minimum amount that you must withdraw from certain retirement accounts each year. You must take your first RMD by April 1 of the year following the year you reach a certain age (details below). Subsequent RMDs must be taken by December 31st of the current year.

Accounts that are subject to RMDs include:

  • Traditional, SEP, and SIMPLE IRAs
  • 401(k) plans
  • 403(b) plans
  • 457(b) plans
  • Profit sharing plans

RMDs assure the government will get their share of tax-deferred retirement accounts. There are substantial tax penalties if you fail to meet your RMDs.

You deferred federal income tax when you made these contributions. When you take the RMD, the distributions are taxed at prevailing ordinary income tax rates in the year of this transaction.

The amount of your RMD, as a percentage of your account balance, increases over time as your life expectancy shortens. The amounts are determined by IRS actuarial life expectancy tables. You calculate your RMD by dividing your account balance on the last day of the prior year by the expected distribution period per the IRS tables.

A typical 72 year old would have an expected distribution period of 27.4 years. If you had $1 million in tax-deferred accounts, the required distribution is $36,496.

A 90 year old would have a lower expected distribution period of 12.2 years. On the same $1 million balance their RMD would be significantly greater, $81,967.

It is important to note that RMDs only apply to tax-deferred retirement accounts. There is no RMD from a taxable account.

You are also not subject to RMDs on Roth accounts if you are the original owner. However, there are different rules if you are the beneficiary of an inherited IRA which are beyond the scope of this post.

Recent Changes to RMD Rules

Since I originally received this reader question, RMD rules have substantially changed. The most notable changes relate to the required start age for RMDs, penalties for failing to take the RMD, and changes related to Roth accounts. Changes are generally favorable.

Beginning in 2023, the start date for RMDs increases from 72 to 73. The age is scheduled to again increase to 75 in 2033. This is a continuation of a trend that benefits those who do not need to take the full RMD amount to meet retirement spending needs. Tax advantaged money can compound longer.

Another notable change is the reduction of the penalty for failing to take your required RMD. The penalty had been 50% on the undistributed amount. New legislation reduces the penalty to 25%, which is further decreased to 10% if the error is corrected in a timely manner. Even reduced penalties underscore the point that these are required transactions designed to force you to pay tax that you had been deferring.

Roth IRA accounts were never subject to RMDs for the original account owners. However, other Roth accounts like Roth 401(k) accounts were subject to RMDs. This changes with recent changes to tax law. Going forward, no Roth accounts are subject to RMDs.

RMDs on Roth accounts could previously be avoided by doing a 401(k) to IRA rollover. However, this may have meant giving up some features of the 401(k) (or other work sponsored retirement accounts) which are preferable to IRAs. The new law eliminates the need to take this action.

Related: Should You Rollover Your 401(k) to an IRA?

What is a SWR?

Your safe withdrawal rate is a conceptual framework. People often discuss the 4% rule which was derived from Bill Bengen’s original research on SWR. 

Bengen was trying to determine the amount that you can safely take without running out of money over the course of  a thirty year retirement. The framework he modeled called for taking that same amount, adjusted annually for inflation, in each subsequent year.

He found, based on the data set and assumptions that he used, that 4% is the maximum withdrawal you could safely take across all the periods he modeled. However, his research showed that in many years the amount you could safely withdraw was substantially higher. 

Of course, there is also no guarantee that future conditions could not be worse than those in his data set. In fact, Morningstar suggested a 3.3% SWR for those starting retirement in early 2022. They have recently increased their suggested SWR to 3.8% for those starting retirement under current market conditions.

In reality, you can’t know what your personal safe withdrawal rate is until after the fact because you can not know what the future holds. No one knows exactly how long we will live, what spending needs may arise during the time we are alive, what future inflation will be, and what market conditions we’ll experience along the way. 

We can only look at past scenarios as a starting point. From that information we need to make our best estimate at what lies ahead.

For an in depth look at SWRs with an emphasis on early retirees, I highly recommend the Safe Withdrawal Rate Series at the blog Early Retirement Now.

What if your RMD > SWR?

With that foundation, let’s address our reader’s question. What if your RMD exceeds your desired safe withdrawal rate? I’ll restate the question in a different way. What if your RMD exceeds your desired spending?

First off, this is an enviable position to be in. Remember RMDs only apply to tax-advantaged retirement accounts. Many people will need the full amount of their RMDs and more to meet retirement spending needs.

There is no requirement to ever spend your taxable investments and savings. You also don’t ever have to take withdrawals from Roth accounts for which you are the original owner. Any money already invested in taxable or Roth accounts could stay invested and grow indefinitely.

Related: When Are Roth Accounts Better Than Tax-Deferred Accounts?

If you have large RMDs that exceed your desired spending, you must take the required distribution and pay the tax created by this transaction. Spend what you need, if anything, from RMD proceeds. Then reinvest any leftover amount into taxable investment accounts or put it into taxable savings accounts.

If you anticipate this scenario in advance, you could strategically convert tax-deferred accounts to Roth accounts. This may allow you to spread taxable distributions over a greater period of time, paying taxes at lower rates. Remember, Roth accounts are not subject to RMDs.

What if your SWR > RMD?

The reader did not ask this question, but this is the more common and complex scenario. What if your RMD does not meet your spending needs?

Your RMD is one source of retirement income which is taxable regardless of whether you need the income in that year or not. Others include any pension, taxable dividends and interest, earned income, as well as a portion of your social security benefits.

Since you are required to pay tax on this income, you should spend income from these sources first. Then if you need more income to meet your spending needs, you would have to assess the sources you have available to you and create that income in the most tax-efficient way.

Unfortunately there is no one size fits all answer as to the best way to do this. Factors to consider are the types of accounts you have available, the amounts in each, and the short and long-term tax impacts of your distribution strategies.

Tax software enables you to see the year-to-year tax impacts. A high fidelity retirement calculator like the NewRetirement PlannerPlus or Pralana Gold tools allows you to see the federal and state tax impacts of your strategies over time. This scenario may also be an example of where paying for financial advice has the potential to add substantial value.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to Financial planning inquiries can be sent to]

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  1. The following comments from your article is a great point and one often overlooked, me thinks:

    “You don’t have to spend your RMD. You can reinvest the proceeds into a taxable account that is not subject to RMDs.”

    I obtained FI a few years ago and pulled the RE plug the second quarter of 2022. After living on cash the remainder of the year, I decided to start doing 72(t) withdrawals this year, which will force me to pull out roughly 6.4% per year of my rollover IRA for a minimum of 6 years unless I want to pay the 10% penalty. At first glance, this was concerning, but part of my strategy is to move as much of my pre-tax accounts to post-tax/no tax accounts as possible before RMDs kick in. Combined with Roth conversions for my wife’s retirement accounts, I believe doing the SEPP withdrawals and then moving the excess of those withdrawals that we do not spend into brokerage accounts to continue to grow, mostly tax-free, fully serves this purpose.

    1. JRobi,

      These types of scenarios are highly dependent on the specifics of your scenario. Utilizing SEPP withdrawals, doing Roth conversions, and even paying a 10% penalty in a particular year or two COULD make sense depending on the specifics.

      I’d be curious to hear more about your strategy if you wanted to send me a private email.


  2. It is important to understand that RMDs are not fixed. They will rarely be the same each year and likely to be higher if the value of the tax deferred accounts remains steady or grows (due to a decreasing expected distribution period based on age). RMDs can also be lower in subsequent years if the value of the tax deferred accounts falls (due to withdrawals and/or market fluctuations).

    People with multiple IRAs need only take the total aggregate RMDs from only one or more of the accounts (i.e. they do not need to take RMDs from every account). People with 401 accounts, however, must take RMDs from each and every account.

    1. Thanks for chiming in Fritz. Good clarifications.

      As I noted, RMDs will increase as a percentage of your account balance each year, but the actual dollar amount could go up or down depending on the performance of the assets in the accounts.

  3. For those that don’t need their RMD (or part of it) for living expenses, it might be helpful to review/explain Qualified Charitable Distributions (QCD).

    1. John H

      Thanks for the recommendation. That could be an idea for a future blog post.

      For the purpose of this post, I wanted to write it in a way that provided enough detail to clear up confusion, but not so much detail that I create even more confusion.

      It’s always tough threading that needle, and so I appreciate reader feedback in the comments to see what others think.


  4. As the reader who asked the initial question, I want to say thank you for writing this post. It is very clear to me now how to proceed. When combined with my wife’s and my Social Security, plus a small union pension, my spending cash needs from my retirement accounts are minimal (we are mostly, but not completely, debt-free). So obviously I need to open brokerage accounts and re-invest the difference.

    But I do have a follow-up question. As I understand it, Roth accounts have requirements related to receiving wages; you can’t open up a Roth account unless you’ve had earned income. My question is this – if you did have some earned income, and opened up a Roth IRA that year, can you continue to contribute to it even in years when you have no earned income? Or can you only contribute to it in years when you’ve had earned income? Obviously I would love to take the surplus RMD and place as much of it in a Roth account as possible, but I am unsure if I can actually do this. Thanks ever so much!

    1. Tom,

      You must have earned income to contribute to a Roth Account. You can, however, convert existing IRA funds to a Roth account, but you must pay tax on the converted amount. Adding the converted amounts to your RMDs may put you in a higher marginal tax bracket.

      There are a number of factors to consider to determine if it is appropriate or worthwhile to do Roth conversions. For many people, it is usually best to do Roth conversions prior to receiving Social Security benefits and prior to taking RMDs.

      1. Fritz,

        Thanks for your contribution. I am already receiving SSA but have yet to start RMDs. I’ve read about Roth conversions, but my financial planner believes they would not be advantageous to me due to tax brackets. I prefer to keep my tax rate as low as possible. My FP, however, is not a tax expert, so I may have to go up the ladder and get clearer tax advice this season. I appreciate your insight.

        1. Tom,

          First off, you’re welcome. Second, your financial advisor may well be correct. To expand on Fritz’s comment, once you are collecting SS that may push you into higher tax brackets. In turn, creating more taxable income by doing the conversions can make more of your SS benefit taxable. It is quite complex.

          It sounds like you have some doubts about your advisor. As noted, you can model these scenarios with the retirement calculators we affiliate with and/or consult with someone who is competent with tax planning. The latter can get expensive, so you would have to determine if you’re talking about big enough dollar decisions to justify the cost. It may be worth it if it gives you peace of mind.


          Thank you for being so on top of responding to the comments. I concur with your responses.

          Best to you both!

  5. My mom is in the situation where her RMD exceeds her desired spending. Mandatory RMD plus social security and government pension is more than enough to meet her expenses. Us kids tell her she should spend more but she’s happy the way things are. So she simply invests the unspent RMD in her taxable account (for potentail future long-term care needs, etc). A nice “problem” to have.

    1. A nice problem to have indeed Phillip.

      I’m curious. Why do you encourage her to spend more if she’s genuinely happy the way things are?

      I ask because I often encourage my parents the same. But my reason is that I think they worry about money more than they need, and I wish they didn’t think about it at all.


  6. I originally thought that congress extending the RMD age was a good thing. But now as I take another look, by extending the age requirement it increases your RMD’s amounts by compressing the timeline and therefore increases your income per year and thus higher tax rates to the govt. If you die below the 73 or 75 ages, its your heirs problem, but if you hang on past those ages the taxes will hurt.

    Whats your thought on this? I don’t see waiting as a good thing anymore. I get the market some years may cause you to want to wait at times but overall the higher tax rates hurt more.

    1. That’s a good question Russ.

      I see it as a good thing for the individual in that position because it gives you more control of when and how you recognize these dollars. For example, say you are 74 years old, and inherit a substantial sum in that year, then you could wait a year and avoid taking a taxable distribution when every dollar of your RMD would be taxed in the highest marginal brackets.

      A more practical and common example is if you wanted to do Roth conversions. With later RMD start dates you would have control over how much you would want to recognize in a given year. This would give you a couple of extra years to do the conversions once the RMD age gets up to 75.

      But you are correct in that all things equal, starting your RMDs later just means that you compress them into a smaller number of years and may actually pay more taxes.


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