If you turned 73 in 2024, the time to take required minimum distributions (RMDs) has arrived. Starting in or shortly after the year in which you reach 73, you typically must make annual withdrawals from your traditional 401(k)s, traditional IRAs and certain other tax-advantaged retirement accounts.
How to calculate RMDs for 2024: Take the balance of the retirement account as of December 31, 2023, and divide it by your “life expectancy factor,” which can be found in IRS Publication 590, Distributions from Individual Retirement Arrangements (IRAs) on IRS.gov.
But you probably don’t even have to do this calculation—the investment company that handles your account likely will do it for you and provide your RMD amount on your account statement or online.
Still, there are some easy-to-overlook nuances with RMDs… easy-to-make mistakes…and strategies that can minimize the impact of RMDs. Here are 10 worth knowing…
RMDs typically must be taken by December 31, but your initial RMD from a retirement account—the one for the year in which you turn 73—can be taken as late as April 1 of the following year without incurring penalties. Problem: If you wait beyond December 31 to take that first RMD, you will end up taking two years’ worth of RMDs in the following calendar year, because the second RMD can’t be pushed past the following December 31. RMDs are taxable income, so taking two years of them in a single calendar year could inflate your income sufficiently in that second year to push you into a higher tax bracket…increase the share of your Social Security benefits that are taxable…and/or increase your Medicare premiums. It also will slightly increase the size of the RMD that you’re required to take in year two—RMD size is based in part on the amount that’s in the retirement account on December 31 of the prior year, and that figure will be higher if you haven’t yet removed your first RMD. Add it all up, and it’s usually better to take the first RMD by December 31 even though you are not required to do so.
The standard advice is to allow investments in tax-deferred accounts to continue to grow for as long as possible—but there are exceptions. As noted above, withdrawals from tax-deferred accounts are taxable income, so if you suspect that tax rates might increase in the years ahead, pulling money out sooner might be better than later—as long as you’re over age 59½, there’s no early withdrawal penalty.
For similar reasons, it can make sense to pull some money out if you happen to have a year in which your taxable income is uncharacteristically low, landing you in a significantly lower tax bracket than usual.
Removing money earlier than necessary also is worth considering if you have more assets than you need for retirement and your goal is to pass as much as possible to your heirs. Someone is eventually going to have to pay income taxes on the money in your tax-deferred accounts, whether that’s you or your heirs. If your heirs are likely to be in a higher tax bracket when they inherit than you are now, you might consider pulling the money out and paying the taxes while you’re still around to do so, rather than leave that tax bill to your heirs.
The penalty for not taking RMDs has recently been slashed from a staggering 50% to a still-steep 25% of the amount you were supposed to take out. Those penalties can be lowered even further—down to 10%—if the error is corrected within two years…and it’s sometimes possible to have them waived entirely by the IRS if you have a reasonable cause for not taking the RMD and take the RMD as soon as possible. But you can’t count on receiving that waiver and you shouldn’t feel comforted by today’s lower penalty rates—the potential cost of missed RMDs remains painfully high, so taking RMDs on time remains crucial.
If you’re over 70½, charitably inclined and tax-averse, you can make a “qualified charitable distribution” (QCD) of up to $105,000 directly from your retirement account to a qualified charity. Not only will the donated money not count as taxable income, it can be used to partially or completely satisfy your RMD.
If you fund a Qualified Longevity Annuity Contract (QLAC) using money in a tax-deferred account, the amount in the QLAC won’t be used in your RMD calculations for the rest of the IRA. Such annuities also are a good way to reduce the odds that you’ll outlive your retirement savings. You can devote up to $200,000 to the purchase of a QLAC, and it can start making distributions as late as age 85.
If your spouse the sole beneficiary of your (non-inherited) tax-deferred account and is at least 10 years younger than you, you qualify to use a different IRS life expectancy table when you calculate RMDs—and the result will be substantially lower RMDs.
If you’re still working when you reach RMD age—and you don’t own 5% or more of the company that you work for—you likely can delay taking RMDs from that employer’s tax-deferred retirement account until after you retire. But: You probably still will have to take RMDs from any other tax-deferred accounts that you have, unless you roll those accounts into your current employer’s plan. Delaying the start of RMDs this way does mean that you’ll have to take larger RMDs each year when you eventually do retire.
This now applies to both Roth IRAs and Roth 401(k)s. But non-spouses who inherit Roths have to fully distribute them within 10 years.
This increased initial RMD age applies to people who were born in 1960 or later.
Non-spousal heirs who inherit tax-advantaged retirement accounts after 2019 often must take RMDs. They are also often required to have the account completely emptied by the end of the tenth year following the year of the original account owner’s death. The IRS is waiving the penalties for missing RMDs on certain inherited IRAs in 2024, and that no doubt will encourage some heirs to not make withdrawals until 2025. But whenever they do start making withdrawals, these heirs must still have these accounts emptied by the end of that tenth year. The longer they wait to start removing money, the more they’ll have to remove during the remaining years to have it all out by the end of that tenth year, and the greater the odds those withdrawals will push them into higher tax brackets…or that Washington will increase tax rates while there’s still a substantial amount in the account.
