Traditional Individual Retirement Accounts (IRAs) are “tax-deferred plans,” meaning you don’t pay taxes on your account contributions or earnings until you take withdrawals. Because the IRS wants to start collecting those taxes sooner rather than later, they require you to start taking annual withdrawals when you reach a certain age. Beginning in 2023, the SECURE 2.0 Act raised the age that you must begin taking required minimum distributions (RMD’s) to age 73. The RMD is the smallest amount you must withdraw from your tax-deferred IRA retirement accounts every year after age 73, whether you need the money or not.
RMDs and Life Expectancy
RMDs are based on the IRS life expectancy tables. There are varying tables for different circumstances. For example, The IRS uniform lifetime table utilizes a life expectancy divisor of 26.5 if you are age 73. To figure the RMD for that year, a person would divide their IRA account balance by 26.5. For example, if the IRA account balance was $100,000, the owner would have to withdraw $3,733.58 ($100,000 divided by 26.5) and pay taxes on this withdrawal in that year.
Each year, your life expectancy divisor is one year less, so the RMD goes up a little bit every year, until it eventually levels off and gradually decreases.
Calculations utilize separate tables for certain circumstances. For example, if your spouse is at least 10 years younger and your sole beneficiary, the IRS requires the use of a separate table for the RMD calculation. In addition, different rules apply if you are the beneficiary of an inherited IRA.
Retirement Accounts Subject to RMDs
In addition to traditional IRAs, these other types of retirement accounts are also subject to RMDs:
• Simplified Employee Pension (SEP) IRAs
• Savings Incentive Match Plan for Employees (SIMPLE) IRAs
• 401(k)s
• Nonprofit 403(b) plans
• Government 457 plans
• Profit-sharing plans
For IRA accounts, you may be able to take your RMD out of one account, or take some from each account, as long as you withdraw the required minimum. Defined contribution plans require you to calculate and satisfy your RMD separately for each plan and withdraw the amount from that plan.
Because Roth IRAs are funded with contributions already taxed, these don’t require RMDs until after the owner dies. Also, if you’re still working after age 73 and have a traditional 401(k) or other workplace contribution plan, you may be able to defer RMDs until April 1 of the year after you stop working.
Schedule for Taking RMDs
For tax year 2023, you must start taking RMDs by April 1 of the year after you turn 73. Let’s say you celebrate your 73rd birthday on July 4, 2023. You must take the RMD by April 1, 2024. You’ll have to take another RMD by Dec. 31, 2024 and by Dec. 31 each year after that.
Note that if you wait until 2024 (up to April) to take your AMD, you will actually be taking two RMDs in 2024: your RMD for tax year 2023 AND your RMD for tax year 2024. Taking two RMDs in one tax year could push you into a higher tax bracket, so it might be wiser to take your first RMD by December 31.
Penalties
The penalty for not taking an RMD is severe, a 50 percent excise tax on the amount you should have taken out. Although the IRS will sometimes forgive the penalty, it’s best not to incur it in the first place.
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