Required Minimum Distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year once you reach a certain age. The rules for RMDs were updated with the Secure 2.0 Act, which increased the RMD age from 72 to 73. This means if you turn 73 in 2024, you will need to start taking RMDs. This change is due to longer life expectancies and rising stock market values.
How Are RMDs Taxed?
RMDs are taxed as ordinary income. This means the money you withdraw will be added to your taxable income for the year. Depending on your total income, this could push you into a higher tax bracket, increase your Medicare premiums, or even make part of your Social Security benefits taxable. It’s essential to plan for these taxes to avoid surprises.
What Happens If You Miss an RMD?
Failing to take the required amount can lead to significant penalties. If you don’t withdraw the RMD or miss the deadline, you’ll face a penalty of 25% of the amount you were supposed to withdraw. However, if you fix the mistake within two years, the penalty can be reduced to 10%. It’s crucial to avoid these mistakes to protect your savings.
When Do You Have to Take RMDs?
Once you turn 73, you must take RMDs by December 31 each year. Even though you can’t avoid RMDs, you can manage the money in several ways. For example, you might put the withdrawn funds into a high-yield savings account to earn interest, reinvest them in other assets, or donate them to charity to offset taxes.
| Aspect | Details |
|---|---|
| Definition | Minimum amount that must be withdrawn from retirement accounts annually starting at age 73. |
| Updated RMD Age | Increased from 72 to 73 with the Secure 2.0 Act. |
| Taxation | Treated as ordinary income; may affect tax bracket, Medicare premiums, and Social Security benefits. |
| Penalty for Missed RMD | 25% of the amount you were supposed to withdraw. Reduced to 10% if corrected within two years. |
| Exemption | Roth IRAs are exempt from RMDs during the account holder’s lifetime; RMDs apply to inherited Roth IRAs. |
| Special Considerations | No RMDs from current employer plans if still working at age 73, except in specific cases. |
Are Roth IRAs Exempt from RMDs?
Roth IRAs are special because they don’t require RMDs during your lifetime. Since you pay taxes on Roth IRA contributions upfront, you don’t have to worry about RMDs while you’re alive. However, if you inherit a Roth IRA, RMDs will apply.
Special Considerations
If you’re still working at age 73 and you have a retirement plan through your current employer, you don’t have to take RMDs from that plan. But if you have retirement plans from previous employers, RMDs are still required. An exception applies if your current employer’s plan mandates distributions at RMD age or if you own more than 5% of the business.
| Tip | Details |
|---|---|
| Plan for Taxes | Set aside money for taxes due to increased income from RMDs. |
| Avoid Penalties | Ensure RMDs are taken by the deadline to avoid 25% penalties (10% if corrected within two years). |
| Use of Withdrawn Funds | Consider saving in a high-yield account, reinvesting, or donating to charity. |
| Roth IRA Exemption | No RMDs required during your lifetime; applies only to inherited Roth IRAs. |
| Special Cases | No RMDs required from current employer plans if still employed, with some exceptions. |
1. What is an RMD?
A Required Minimum Distribution (RMD) is the minimum amount you must withdraw from your retirement accounts each year once you reach age 73.
2. How are RMDs taxed?
RMDs are taxed as ordinary income, potentially increasing your AGI and affecting your tax bracket, Medicare premiums, and Social Security benefits.
3. What happens if I don’t take my RMD?
Failing to take the required RMD results in a penalty of 25% on the amount you missed, though this can be reduced to 10% if corrected within two years.
