Retirees in the U.S. must navigate the rules around Required Minimum Distributions (RMDs), the minimum amount they need to withdraw from their retirement accounts annually. These withdrawals, from accounts such as IRAs or 401(k)s, carry tax implications. Here’s what you need to know about RMDs and the key considerations for this year.
RMDs
Starting at age 73, retirees must begin taking annual withdrawals from their retirement plans, known as RMDs. This age was increased from 72 to 73 with the passage of the Secure 2.0 Act last year. Despite the increase in the starting age, RMDs are particularly substantial this year due to record stock market gains and an influx of new retirees.
According to Fidelity Investments, cumulative RMDs are projected to reach a record $25 billion this year. As Rita Assaf, vice president of retirement products at Fidelity, stated, “We estimate that RMDs in 2024 will be the largest ever because the market peaked on Dec. 31, 2023, and because more clients are now eligible.”
If you are turning 73 this year, understanding these four crucial aspects of RMDs is essential.
Taxation
RMDs are taxed as ordinary income. This means they increase your adjusted gross income (AGI), potentially pushing you into a higher tax bracket, increasing Medicare premiums, and causing your Social Security income to be taxed depending on your state. This increase in AGI can also disqualify you from other tax benefits.
Penalties
Failure to take RMDs on time or withdrawing less than required can result in a hefty 25% penalty on the amount you should have withdrawn. However, if you correct the mistake within two years, the IRS may reduce the penalty to 10%. It’s crucial to adhere to the RMD rules to avoid these penalties.
No Bypassing RMDs
RMDs must be taken by December 31 each year after turning 73. Although there’s no way to avoid RMDs, you can reinvest the money or place it in a high-yield savings account to earn interest, thereby making the most of these withdrawals.
Roth IRA Exemption
Roth IRAs are not subject to RMDs because taxes on contributions were already paid. Additionally, if you are at least 59 and a half years old and have owned the account for five years, your investment gains are entirely tax-free. The only exception is if you inherited a Roth IRA, in which case RMDs apply.
Navigating RMDs is a crucial part of retirement planning. Knowing how they work, the tax implications, penalties for non-compliance, and the exceptions can help you manage your retirement funds more effectively. Staying informed and planning accordingly can ensure a more secure financial future.
FAQs
What age must you start taking RMDs?
Starting at age 73.
How are RMDs taxed?
As ordinary income.
What is the penalty for not taking RMDs?
25%, reducible to 10% if corrected within two years.
Can you avoid taking RMDs?
No, but you can reinvest the withdrawn funds.
Do Roth IRAs require RMDs?
No, unless inherited.