Do you have any retirement savings? Be careful, because there is a rule that you cannot ignore. If you have a 401(k) or IRA account, you should be aware of the well-known Required Minimum Distributions (RMDs).
In short, these are the minimum amounts that the IRS requires you to withdraw from your savings each year, no matter what. Why? Really, make sure you pay your taxes before spending that money.
What exactly are RMDs in retirement?
Imagine you have a massive jar full of candy that you’ve been saving for years. Well, the IRS says you can’t keep that jar full indefinitely. You must begin eating candy every year and pay me a portion of each piece you consume. Sounds fair, doesn’t it? Well, it depends.
The curious thing is that it makes no difference whether you really need the money or not. You are required by law to begin making these withdrawals when you reach the age of 73. Oh, and if you were born in 1951, take note of this date: April 1, 2025. That is the deadline for making your first RMD.
Who does this affect?
Here’s a quick list so we don’t get too confused:
- If you have a traditional IRAÂ account.
- If you use SEP IRA or SIMPLE IRAÂ accounts.
- If you participate in retirement plans like 401(k), Roth 401(k), 403(b), or 457(b).
Pay attention to this: if you work for a company and have an employer-sponsored retirement plan, you can defer your RMDs until you retire. There is one exception: if you own more than 5% of the company, the rules change.
By the way, Roth accounts within a 401(k) or 403(b) were subject to these rules in 2023. However, starting in 2024, there is good news! These accounts will be exempt from RMDs as long as the owner is still alive.
How is the amount you should withdraw calculated?
The calculation, while seemingly complicated, makes sense. You must divide the balance in your account at the end of the previous year by your current life expectancy.
How do you know what your life expectancy is? You don’t have to use divination to figure out how long you’ll live. The IRS has specific tables available on their website to assist you with this.
It’s a somewhat technical formula because it is based on your age, gender, and some statistics that appear to have come from an advanced math course. But, in short, the younger you are at the time of calculation, the lower the percentage you must withdraw.
Despite the topic’s technicality and potential boredom, it is critical to pay attention. Ignoring the RMD can be costly because the IRS imposes severe penalties if you do not follow the rules.
So, if you have any questions, talk to your financial advisor or consult the IRS guides directly. Isn’t it better to be cautious than to risk getting into trouble with the tax authorities?
