Essential Reminder: Take Your Required Minimum Distributions

As the year draws to a close, retirees need to remember to take their Required Minimum Distributions (RMDs) from retirement accounts. The Internal Revenue Service (IRS) mandates this annual withdrawal for individuals who have reached a certain age, and failing to take it can result in significant penalties.

Required Minimum Distributions are the minimum amounts that must be withdrawn annually from retirement accounts such as traditional IRAs, SEP IRAs, SIMPLE IRAs, and most employer-sponsored retirement plans. They help provide additional income for support throughout retirement.

The amount of your RMD is calculated based on your account balance as of December 31 of the previous year and your life expectancy according to IRS tables. It’s important to note that you can always withdraw more than the required minimum, but you cannot apply excess withdrawals to future years’ RMDs. If you have multiple IRAs, you have the option to take RMDs from each IRA or you can withdraw the total sum of RMDs from just one account.

The age at which you must start taking distributions, the “required beginning date,” has changed in recent years due to new legislation and can vary by your date of birth. Under the SECURE Act 2.0, a person will need to begin withdrawing from their IRA or retirement plan the year in which they turn 72 (or 73, if you reached age 72 after December 31, 2022). If the RMD is not taken, a 25% excise tax will be assessed.

For most individuals, the deadline to take your annual RMD is December 31. However, there’s a special rule for your first RMD. In the year you reach your required beginning date, you have until December 31 of the following year to take your RMD. Another exception is that you can delay RMDs from a 401(k) past age 73 provided you meet certain conditions:

1. You are still working at the company that sponsors your retirement plan, and
2. You do not own more than 5% of the company.

For example, assume that your Required Minimum Distribution for 2024 is $10,000. You must withdraw $10,000 from the IRA into a taxable account, and the $10,000 will be reported as income on your tax return. Distributions can be done in cash or in kind. If you only withdraw $7,500 in the year, you will owe 25% excise tax on the $2,500 not taken, or $625 in additional taxes. If corrected in a timely manner, however, the penalty may be reduced to 10%.

If in the above example you only just turned 73 this year, then you have until December 31, 2025, to take your first RMD. However, you will still have an RMD for 2025.

Remember that RMDs are taxed as ordinary income in the year they are taken. It’s wise to set aside a portion of your distribution for federal and state taxes. Talk with your advisor if you’re unsure about how much to withhold.

If you’re fortunate enough not to need some or all of your RMD, consider a Qualified Charitable Distribution (QCD). With a QCD, you can avoid taxes by sending your RMD to a charity of your choosing.

It’s also worth noting that Roth IRAs do not require RMDs during the owner’s lifetime. However, the rules around inherited retirement accounts can be confusing, so check with your advisor before year end to avoid penalties.

RMDs are just part of a comprehensive retirement plan, and proper management can help ensure your financial security throughout your retirement years. Don’t let this important financial obligation slip your mind. Mark your calendar, review your accounts, and take action to satisfy your RMD requirements before the year-end deadline.