or many years, you put money into retirement accounts and let it grow without paying tax on it. At some point, the government requires you to start taking money out. These required withdrawals are called required minimum distributions, or RMDs, and they can have a larger effect on your taxes and your plans than many people expect.
When RMDs begin
For most people today, RMDs begin at age 73. Under current law, the starting age rises to 75 for people born in 1960 or later. The rule applies to traditional IRAs and most employer plans such as 401(k) and 403(b) accounts. Roth IRAs do not require withdrawals during the owner’s lifetime, and Roth accounts inside employer plans are no longer subject to RMDs starting in 2024. If you are still working at age 73 and own less than five percent of the company, you may be able to delay RMDs from that employer’s plan until you retire, though this exception does not apply to IRAs.
How the amount is calculated
Your RMD is based on your account balance at the end of the prior year, divided by a life expectancy factor published by the IRS. The factor gets smaller as you age, so the required percentage rises over time. If you have several IRAs, you calculate each one separately but can take the total from any of them. Employer plans generally have to be handled account by account, so it helps to keep track of each one.
The timing matters
Your first RMD is due by April 1 of the year after you reach the starting age. After that, each year’s withdrawal is due by December 31. If you delay your first one until April, you will have to take two RMDs in that same calendar year, which can push you into a higher tax bracket. Many people choose to take the first one in the year they reach the age to avoid that bunching.
What happens if you miss one
The penalty for missing an RMD is an excise tax of 25 percent of the amount you should have taken. It can be reduced to 10 percent if you correct the mistake within a set period. That is far more costly than taking the withdrawal on time, so a calendar reminder and a clear process are well worth having.
Ways to plan ahead
RMDs are taxed as ordinary income, so they can raise your tax bracket, increase the portion of Social Security that is taxed, and affect Medicare premiums. There are ways to prepare. Some people convert part of a traditional IRA to a Roth IRA in lower-income years, which reduces future RMDs. Others use qualified charitable distributions, which allow people age 70½ and older to give directly from an IRA to a charity and count the gift toward their RMD without including it in taxable income. Coordinating withdrawals across your accounts, and deciding what to do with the money if you do not need it, is part of the plan as well.
Start before the deadline
Because the deadline falls at the end of the year, now is a good time to review your accounts if you are subject to RMDs. At Mackeson, we help clients coordinate RMDs with their taxes, charitable giving, and income needs. If you would like to talk it through, we would be glad to hear from you.
