Retirement Planning Essentials: RMDs, Distribution Rules, and Sequencing for the CFP Exam

Retirement planning is one of the largest domains on the CFP exam. Within that domain, distribution planning (what happens when clients start taking money out of their accounts) is where candidates most often lose points. The rules around required minimum distributions, early withdrawals, Roth conversions, and the sequencing of account withdrawals are detailed, frequently updated, and heavily tested.

This post covers the distribution mechanics every CFP candidate needs to know.

Required Minimum Distributions

Required minimum distributions (RMDs) are mandatory annual withdrawals from tax-deferred retirement accounts. The rules changed significantly with the SECURE Act (2019) and the SECURE 2.0 Act (2022).

Current RMD Starting Age

Under SECURE 2.0, the required beginning date for RMDs is April 1 of the year following the year the account owner turns 73. The April 1 deadline applies only to the first RMD. Subsequent RMDs must be taken by December 31 each year.

Important: Taking the first RMD in April of the year after turning 73 means the account owner takes two RMDs in the same calendar year (the first for age 73 and the regular distribution for age 74). This can push the owner into a higher tax bracket that year. For clients who can afford it, taking the first RMD by December 31 of the year they turn 73 may be the better strategy.

Accounts Subject to RMDs

RMDs apply to:

• Traditional IRAs
• SEP-IRAs
• SIMPLE IRAs
• 401(k), 403(b), and 457(b) plans
• Inherited IRAs and inherited Roth IRAs (rules covered below)

Roth IRAs owned by the original owner are not subject to RMDs during the owner's lifetime. This is one of the major advantages of Roth accounts for estate planning.

Calculating the RMD Amount

RMD = Account balance as of December 31 of the prior year divided by the applicable distribution period from the Uniform Lifetime Table.

The CFP exam does not require you to memorize the Uniform Lifetime Table numbers, but you must understand the calculation process and the concept that the divisor decreases as the account owner ages, resulting in larger RMD percentages over time.

Married account owners whose spouse is more than 10 years younger may use the Joint Life Expectancy Table, which produces smaller RMDs. This is a testable planning consideration.

Failure to Take an RMD

Prior to SECURE 2.0, the penalty for failing to take an RMD was 50 percent of the shortfall (the amount not taken). SECURE 2.0 reduced this penalty to 25 percent, and to 10 percent if the missed RMD is corrected within two years.

The CFP exam tests penalty rates. Know both the old rate (50 percent, may still appear in older questions) and the current rate (25 percent, with 10 percent for timely correction).

Inherited IRA Distribution Rules

The SECURE Act dramatically changed how non-spouse beneficiaries handle inherited IRAs.

Eligible Designated Beneficiaries (EDBs)

Certain beneficiaries are classified as eligible designated beneficiaries and may still use the stretch IRA (lifetime distribution) method. EDBs include:

• Surviving spouses
• Minor children of the account owner (until they reach the age of majority)
• Disabled beneficiaries
• Chronically ill beneficiaries
• Beneficiaries not more than 10 years younger than the deceased owner

The 10-Year Rule for Non-EDBs

All other non-spouse beneficiaries must distribute the inherited account within 10 years following the year of the original owner's death. There are no required annual withdrawals during the 10-year period (under most IRS interpretations), but the full account must be depleted by December 31 of the 10th year.

Exception: If the original owner died after their required beginning date and already started taking RMDs, the beneficiary may still need to take annual distributions during the 10-year period based on the beneficiary's life expectancy. The IRS has provided relief from this rule in recent years, but candidates should be aware of the complexity.

Spouse as Beneficiary

A surviving spouse has unique options not available to other beneficiaries:

• Roll the inherited account into their own IRA (delaying RMDs to their own RMD starting age)
• Treat the inherited account as their own IRA
• Keep it as an inherited IRA and take distributions over their lifetime

Surviving spouse planning is frequently tested in CFP case studies. Rolling into the spouse's own IRA generally delays RMDs, which is beneficial if the surviving spouse does not need the money. If the surviving spouse is under 59.5 and needs distributions, keeping it as an inherited IRA may be preferable (inherited IRA distributions are exempt from the 10 percent early withdrawal penalty).

Early Withdrawals and the 10 Percent Penalty

Distributions from traditional IRAs and retirement plans before age 59.5 are generally subject to a 10 percent early withdrawal penalty in addition to ordinary income tax. The CFP exam tests the exceptions to this penalty extensively.

Exceptions to the 10 percent early withdrawal penalty include:

• Death or disability
• Substantially equal periodic payments (72(t) distributions) based on the account owner's life expectancy
• Higher education expenses (IRA only)
• First-home purchase, up to $10,000 lifetime (IRA only)
• Health insurance premiums while unemployed (IRA only)
• Unreimbursed medical expenses exceeding 7.5 percent of AGI
• IRS levy on the IRA or plan account
• Distributions from a 401(k) or other employer plan after separation from service at age 55 or older (Rule of 55)
• Qualified reservist distributions
• Birth or adoption expenses, up to $5,000 per child (SECURE Act)

The Rule of 55 is a popular exam topic because it is less well known: an employee who separates from service at age 55 or older can take distributions from that employer's 401(k) without the 10 percent penalty, even though they are not yet 59.5. This rule applies only to the plan of the employer they separated from, not to IRAs or plans from prior employers.

Roth Conversion Planning

A Roth conversion moves money from a traditional IRA (or other pre-tax account) into a Roth IRA. The converted amount is included in taxable income in the year of the conversion.

When Roth Conversions Make Sense

Conversions are most advantageous when:

• The client expects to be in a higher tax bracket in the future (pay tax now at a lower rate)
• The client has current-year losses or deductions that offset the conversion income
• The client has a long time horizon for the Roth account to grow tax-free
• The client does not need the converted funds and wants to reduce future RMDs

Conversions are less attractive when:

• The client is in a high current-year tax bracket
• The conversion would push income into Medicare premium thresholds (IRMAA surcharges)
• The client would need to use converted funds to pay the resulting tax bill (reducing the effective return)

Roth Conversion and RMD Reduction

A key planning strategy for clients with large traditional IRA balances is systematic Roth conversion in years before RMDs begin. Converting $50,000 per year for 10 years before age 73 can significantly reduce the traditional IRA balance and therefore the future RMD obligations.

Withdrawal Sequencing

For clients in retirement who draw from multiple account types (taxable brokerage, traditional IRA, Roth IRA), the order of withdrawals affects lifetime tax costs.

A common sequencing strategy:

1. Taxable accounts first (to allow tax-deferred accounts to continue growing)
2. Traditional IRA/401(k) accounts next
3. Roth accounts last (to maximize tax-free growth period)

However, this general rule has exceptions. If a client is in a low-income year, it may make sense to take traditional IRA distributions early to fill up the lower tax brackets, potentially reducing future RMD tax burdens. This is called bracket management.

CFP exam case studies frequently test whether candidates can identify the most tax-efficient withdrawal sequence given a specific client situation. There is rarely one universally correct answer. The optimal sequence depends on the client's current tax bracket, projected future brackets, account balances, and estate planning goals.

RMD mechanics, inherited IRA rules, and the Roth conversion decision are the three areas where the CFP exam goes deepest in retirement planning. Cover each one thoroughly and you will handle the retirement domain with confidence.