Jean Chatzky
Do one thing: If you (or a spouse or parent) reached age 73 in 2024 and have a retirement account such as an IRA or 401(k), it’s important to know that your first Required Minimum Distribution is due by April 1, 2025 (based on your account balance on Dec. 31, 2023), according to the IRS.
Unpacking RMDs
Unless you are nearing retirement (age or have a parent or spouse in that situation), you may not yet be familiar with Required Minimum Distributions (RMDs).
- What is an RMD? In simple terms, RMDs are the minimum amounts those with Independent Retirement Accounts (IRAs) and other retirement accounts typically must withdraw each year beginning at age 73.
- Other RMD Considerations. There are a few caveats, of course. Some people with retirement plan accounts can delay taking their RMDs until the year they retire unless they are a 5% owner of the business sponsoring the plan, notes the IRS. Those with traditional IRAs and some other accounts known as SEPs and SIMPLE IRAs, are required by the IRS to begin taking RMDs once they reach 73, even if they are retired.
Which Retirement Plans Require Minimum Distributions?
According to the IRS, the RMD rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. Those same rules also apply to traditional IRAs and IRA-based plans such as the previously mentioned SEPs and SIMPLE IRAs.
Do Any Retirement Plans Not Require Minimum Distributions?
It’s important to note that after-tax accounts, such as Roth IRAs and Roth 401(k)s have no such requirement, explains Christopher Diodato, founder and lead financial planner of WELLth Financial Planning. “Additionally, if someone is still working beyond the age of 73 and has a retirement plan with their employer, they are not required to take RMDs from that specific account.”
However, once an account owner is deceased, the RMD rules will apply to beneficiaries of Roth IRA and Designated Roth accounts.
RMD Penalties
Unfortunately, you will be required to pay extra taxes for not taking a required minimum distribution on time, notes the IRS. Those who don’t take any distribution – or a distribution that isn’t large enough – may have to pay a 25 percent tax on the amount not distributed, or a 10 percent tax if the RMD is withdrawn (in other words, the problem is remedied) within two years.
Planning Ahead for RMDs (And Extra Income)
Justin Pritchard, a certified financial planner with Approach Financial, Inc., in Montrose, California, says it’s wise to be prepared when it comes to Required Minimum Distributions and the additional income they can create.
“RMDs can cause unwanted income, which could push you into high tax brackets,” notes Pritchard. “Higher income can also cause you to pay more for Medicare (because of IRMAA charges) and have more of your Social Security income included in your taxes.”
Strategies for Lowering RMDs
For those concerned about big RMDs, Pritchard says it might make sense to manage the size of your pretax accounts. “You can do that by spending down pre-tax balances when you stop working, and you might pair that strategy with delaying Social Security,” he notes. “The result is smaller RMDs and a bigger Social Security payment.”
- Roth Conversions. You can also consider utilizing a Roth conversion to reduce your future RMDs, Pritchard explains, adding “You might convert a modest amount every year in years when you have a low income. For many people, that’s after they stop working, and before Social Security begins. By doing this, you level out your income and the taxes you pay, and you might dodge those Medicare surcharges.”
Seeking Professional Guidance
If all of this sounds more than a little confusing, it could be a good idea to seek guidance from a certified financial planner or a tax planning professional with experience helping people at or near retirement. For most people, a financial advisor who charges by the plan, or even by the hour, can offer a cost-effective way to stay on the right track. In my opinion, using a fiduciary — an advisor who is legally bound to look out for your best interest and isn’t going to try and sell you products — is a smart way to go.
How to Find Qualified Financial Advisors
If you don’t already have a financial planner or advisor, check with your credit union to connect with an in-house advisor. Then, here are some other resources to help.
- XYPN, or the XY Planning Network offers a national group of sworn fiduciaries who are fee-only financial advisors. On their website — you can search by location, specialty, or even a keyword, depending on your needs.
- The Garrett Planning Network is a group of fee-only independent financial advisors. They charge a set fee, instead of a commission or a percentage of your assets. Their advisors also will work on an hourly basis, so you can contact a planner for a few hours of help.
With reporting by Casandra Andrews
Chris O'Shea
