Traditional Individual Retirement Accounts (IRAs) and other retirement plans 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, it requires you to start making annual withdrawals when you turn age 73, known as a “required minimum distribution” or RMD. The RMD is the smallest amount you must withdraw from your tax-deferred 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. For example, at 73, the average person is expected to live another 16.4 years. To figure the RMD for that year, a person would divide their IRA account balance by 16.4. For example, if the IRS account balance were $100,000, they would have to withdraw $6,098 ($100,000 divided by 16.4) and pay taxes on this withdrawal in that year.
Each year, your life expectancy is one year less, so the RMD goes up a little bit every year until the age of your life expectancy is reached. Then it levels off and gradually decreases.
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
You can take your RMD out of one account, or take some from each account, as long as you withdraw the required minimum.
Because Roth IRAs are funded with contributions already taxed, these don’t require RMDs until after the owner dies. And, 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 the 2023 RMD by December 31, 2023.
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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