As 2025 approaches, retirees must be vigilant about Required Minimum Distributions (RMDs) from their retirement accounts.
The Internal Revenue Service (IRS) mandates that individuals who turned 73 in 2024 must commence RMDs by April 1, 2025.
Understanding Required Minimum Distributions (RMDs)
RMDs are the minimum amounts that retirees must withdraw annually from specific retirement accounts once they reach a certain age.
This requirement ensures that retirement funds, which have benefited from tax deferral, are eventually taxed.
Who Needs to Take an RMD by April 1, 2025?
Individuals who reached the age of 73 in 2024 are required to take their first RMD by April 1, 2025. This group includes those born between January 1, 1951, and December 31, 1951.
Subsequent RMD Deadlines
After the initial RMD, retirees must continue taking distributions annually by December 31. For example, if the first RMD is taken by April 1, 2025, the second must be taken by December 31, 2025.
Retirement Accounts Subject to RMDs
The following retirement accounts are subject to RMD rules:
- Traditional IRAs: Individual Retirement Accounts where contributions may be tax-deductible, and earnings grow tax-deferred.
- SEP IRAs: Simplified Employee Pension plans established by employers for their employees.
- SIMPLE IRAs: Savings Incentive Match Plans for Employees, typically used by small businesses.
- 401(k) Plans: Employer-sponsored defined-contribution plans allowing employees to contribute a portion of their wages.
- 403(b) Plans: Retirement plans for certain public school employees and tax-exempt organizations.
- 457(b) Plans: Deferred compensation plans for government and some non-profit employees.
Notably, Roth IRAs are exempt from RMDs during the original owner’s lifetime.
Calculating Your RMD
The RMD amount is determined by dividing the retirement account’s prior year-end balance by a life expectancy factor provided by the IRS.
For instance, if a retiree’s traditional IRA balance was $500,000 on December 31, 2023, and their life expectancy factor is 26.5, the RMD for 2024 would be approximately $18,867.92 ($500,000 ÷ 26.5).
Consequences of Missing the RMD Deadline
Failure to withdraw the RMD by the specified deadline can result in a substantial penalty.
The IRS imposes a 25% excise tax on the amount not distributed as required. However, if the RMD is corrected within two years, the penalty may be reduced to 10%.
Special Considerations
- Still Working Exception: Employees who are still working past age 73 and do not own 5% or more of the business sponsoring the plan can delay RMDs from their workplace retirement plan until the year they retire.
- Multiple Accounts: If a retiree has multiple IRAs, the RMD must be calculated separately for each account but can be withdrawn from any one or more of the IRAs. For employer-sponsored plans, RMDs must be taken separately from each account.
RMD Deadlines Overview
| Milestone Age | First RMD Deadline | Second RMD Deadline |
|---|---|---|
| 73 in 2024 | April 1, 2025 | December 31, 2025 |
| 73 in 2025 | April 1, 2026 | December 31, 2026 |
| 73 in 2026 | April 1, 2027 | December 31, 2027 |
Steps to Ensure Compliance
- Review Account Balances: Check the December 31 balance of each retirement account from the previous year.
- Use the Correct Life Expectancy Factor: Refer to the IRS Uniform Lifetime Table to find the appropriate factor based on age.
- Calculate the RMD: Divide the account balance by the life expectancy factor.
- Plan Withdrawals: Decide whether to take the RMD as a lump sum or in installments throughout the year.
- Consult Financial Advisors: Seek guidance to ensure accurate calculations and timely withdrawals.
Retirees reaching the age of 73 in 2024 must be proactive in understanding and fulfilling their RMD obligations by April 1, 2025.
Timely compliance not only avoids hefty penalties but also aligns with financial planning strategies to maintain a stable retirement income.
FAQs
What happens if I miss my RMD deadline?
Missing the RMD deadline can result in a 25% excise tax on the amount not withdrawn. If corrected within two years, the penalty may reduce to 10%.
Are Roth IRAs subject to RMDs?
No, Roth IRAs are not subject to RMDs during the original owner’s lifetime.
Can I take more than the required minimum distribution (RMD)?
Yes, retirees can withdraw more than the RMD amount, but any excess withdrawals will still be subject to income tax.