Required Minimum Distributions: What Retirees Need to Know Before Year-End

For many retirees, one of the biggest changes after leaving the workforce is that the government eventually requires them to withdraw money from certain retirement accounts.

These withdrawals, known as required minimum distributions, apply to most traditional IRAs and employer-sponsored retirement plans like 401(k)s and 403(b)s. Missing an RMD deadline can trigger significant tax penalties, making it important to understand the rules and plan ahead.

Under current law, individuals generally must begin taking RMDs when they turn 73. The age was raised from 72 in 2023 under the SECURE 2.0 Act and is scheduled to increase again to 75 beginning in 2033.

Your first RMD may be delayed until Apr. 1 of the year after you turn 73, but subsequent distributions generally must be taken by Dec. 31 each year.

Don't delay

While delaying your first withdrawal may sound appealing, doing so means you'll likely have to take two RMDs in the same calendar year — your delayed first distribution and your second annual distribution. This could increase your taxable income for the year and affect Medicare premiums or the taxation of Social Security benefits.

The amount you must withdraw is based on your retirement account balance at the end of the previous year and your life expectancy, as determined by IRS tables. Because both factors change over time, your RMD amount is recalculated each year.

Failing to take the full required amount by the deadline can be costly. The IRS generally imposes a penalty equal to 25% of the amount that should have been withdrawn. If the mistake is corrected within two years and the required paperwork is filed, the penalty may be reduced to 10%.

Options for withdrawing funds

Fortunately, retirees have several ways to satisfy their RMD requirements.

Withdraw funds — The most straightforward approach is to withdraw cash from the account. While this is the simplest method, the distribution is generally taxable if it comes from a pre-tax retirement account.

Make an in-kind transfer — Retirees who don't need the money for living expenses may move investments directly to a taxable brokerage account instead of selling them first. This allows the investments to remain in the market, although the distribution is generally still taxable.

Direct funds to charities — Those who regularly support charitable organizations may direct all or part of their RMD to a qualifying charity, potentially satisfying the distribution requirement without including that amount in taxable income, subject to IRS rules and annual limits.

Set up auto withdrawals — Many financial institutions allow retirees to have their RMD calculated and distributed according to a chosen schedule, reducing the risk of missing a deadline.

Buy annuities — Some retirees may choose to purchase a qualifying longevity annuity contract. By using a portion of their retirement savings to purchase this type of deferred income annuity, eligible retirees may be able to delay RMDs on the amount invested until later in retirement, subject to IRS limits and requirements.

Because every withdrawal strategy carries different tax implications, retirees should review their options carefully and consider consulting a qualified tax or financial professional before deciding which approach best fits their retirement income plan.