Required Minimum Distributions Start at 73 or 75, and a Missed One Costs 25%

Money in a traditional IRA or 401(k) went in before tax, and the IRS eventually wants its share. A required minimum distribution, or RMD, is the amount you have to take out each year once you reach a certain age. It counts as taxable income in the year you take it.

The starting age depends on when you were born. Right now it's 73 if you were born from 1951 through 1959, and 75 if you were born in 1960 or later. Roth IRAs don't have RMDs for the original owner, and starting in 2024, Roth money inside a 401(k) doesn't either.

The amount comes from a short formula. Take the account balance on December 31 of the year before, and divide it by a factor from the IRS Uniform Lifetime Table. At 73 the factor is 26.5, so a $400,000 IRA means an RMD of about $15,094, roughly 3.8% of the balance. The factor shrinks every year, so the percentage climbs, and by 80 it's about 5%. If your spouse is your only beneficiary and more than ten years younger, a different table applies and the required amount is smaller.

Your first RMD can wait until April 1 of the year after you reach the starting age, but that delay has a cost. The second one is still due by December 31 of that same year, so waiting means two RMDs land in one tax year. That can push you into a higher bracket, and it can raise your Medicare premiums, because Medicare charges more for Part B and Part D when your income from two years earlier passes certain levels.

Each IRA's RMD is figured separately, but you can take the total from any one of your IRAs. Each 401(k) has to pay out its own. If you're still working and don't own more than 5% of the company, your current employer's plan may let you wait until you retire. Plans differ, so ask.

Miss one, and the IRS charges a 25% excise tax on the amount you should have taken. Fix it within the correction window, generally by the end of the second year after the miss, and the tax drops to 10%. On a missed $15,094, the tax is about $3,774, or about $1,509 if you correct it in time. You report it on Form 5329, and the IRS can waive it if the miss was a reasonable error you've already fixed.

RMDs are a reason to plan withdrawals before they're forced on you. The years between retiring and the starting age are often your lowest-income years, which makes them a good time to take some IRA money out on purpose, or convert some to a Roth, while your tax rate is lower. Some retirees who don't need their RMD to live on use the after-tax amount to pay premiums on a life insurance policy for their kids. The death benefit generally passes free of income tax, while an IRA the kids inherit usually has to be emptied, and taxed, within ten years.

I'm a licensed insurance broker, not a CPA, so run your own numbers past your tax preparer.

Find last December 31's balance on each traditional account statement and divide it by the factor for your age. Put that amount and its December 31 deadline on your calendar now.