Have you recently turned 73 years old (or are about to)? Have you inherited any retirement accounts in the past year? Are you interested in understanding your possible tax burden in retirement? Then this article is for you! With the end of 2024 just a couple of months away, now is a great time to start thinking about fulfilling any Required Minimum Distributions (RMDs) you might have.
What are RMDs?
RMD stands for Required Minimum Distribution and it refers to a minimum amount you must withdraw from any pre-tax/traditional retirement accounts you hold once you reach a certain age. RMDs also apply to any retirement accounts (pre-tax or Roth) that you inherited from someone other than your spouse. As the name suggests, an RMD is just the minimum amount you must take out of these accounts. You are welcome to take more than the minimum (and pay the corresponding taxes) if you need additional funds.
Who has to take RMDs?
There are two main reasons someone might be required to take an RMD:
- You own a traditional or pre-tax retirement account such as an IRA, 401k, 403(b), 457, SEP or SIMPLE IRA and you are 73 years old or older. Note: This age was raised from 72 starting in 2023.
- You inherited a retirement account from someone other than your spouse. In the case of an inherited retirement account, RMDs apply for both pre-tax/traditional and Roth accounts.
How much do I need to take out of my accounts to satisfy the RMD?
The RMD for your personal retirement accounts is calculated using two numbers:
- The value of your account as of December 31 the previous year. For 2024, the account value snapshot was taken on December 31, 2023.
- The IRS uniform lifetime table. The uniform lifetime table is a simple chart that estimates your statistical life expectancy and uses that to determine the amount you must withdraw from your accounts. You simply divide your account balance as of December 31 by your life expectancy (stated in years) to get your RMD for the next year.
If you have an inherited retirement account, the RMD calculation is different and is subject to one of two calculations:
- If you inherited a retirement account from someone who passed before 2020: You have the option of taking distributions over the course of your lifetime or depleting the account within 5 years.
- If you inherited a retirement account from someone who passed after 2020: You must deplete your account within 10 years. You may be required to take a minimum amount each of those 10 years or you may have the option to wait and pull amounts out as desired (ensuring depletion after 10 years).
When do I have to take my RMDs by?
For personal accounts, you must take your first RMDs no later than April 1 of the year following the year you turn 73. So, if you turn 73 in July 2024, you need to take your RMDs no later than April 1, 2025. After that, you must take your annual RMD by December 31 each year.
For inherited accounts, you must take your first RMD no later than December 31 the year after the original owner’s death. If the original owner was already taking RMDs at the time of their death, you may be required to take the first distribution the same year.
Why do I need to take RMDs?
The accounts that are subject to RMDs have never been taxed. You (or the original owner, if an inherited account) got a tax break when contributing to these accounts and that amount has grown tax-deferred since the account was opened. Now the IRS wants to claim some of the taxes due.
What happens if I don’t take my RMDs?
The penalties for not taking your RMD are steep. You will be subject to a 25% excise tax on the amount of the RMD you did not withdraw. While there is the potential for that tax to be reduced if promptly corrected, it is best to take your RMDs on time and in full each year.
What if I have several traditional/pre-tax accounts?
For IRAs and 403(b)s, you can decide to pull the specific RMD for each account, or you can calculate your total RMD due across all your accounts and pull that total amount from one account. For 401k and 457 plans, you must pull the specific amount required from each plan individually.
As with many IRS and tax guidelines, there are nuances to these rules. Please reach out to a financial or tax professional to determine how these rules might impact you and ensure you are taking the correct RMD amount each year. As always, we are here to help! If you think you might be subject to an RMD, please reach out to the team at (781) 281-7048 or email us at theteam@horizonwp.com.