The ABC’s of RMD’s

The Day of Reckoning is quickly approaching for some retirees – it’s time to pay up after years of saving in those “tax-deferred” retirement accounts…and suddenly realizing that tax-deferred does not mean tax-free.

Changes in federal tax laws have let some of us postpone those mandatory withdrawals, or Required Minimum Distribution, for several years. But no more extensions are coming.

What are Required Minimum Distributions?

Required minimum distributions, or RMDs, are the minimum amounts you must withdraw from your retirement accounts each year. You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 73.

“Basically, the IRS for all these years, has never made money off of you,” says Eric Bond, president of Octave Wealth Management in Long Beach, California. “In fact, they’ve lost money because you’ve taken a deduction every single year on your income taxes.

“So now it’s time to pay the piper,” he says. “If you forget to do it the first year, you’re cool. You have till April 1. And sometimes people will say, well, I’ll just do that – defer it. Well, if you do it April 1 of next year, it’s fine. But you will have to take two that year, the one you deferred from the previous year in the one in the you know for that year. Sometimes that could bump you up to a higher tax bracket.”

According to the IRS, if you reach age 73 in 2024:

• Your first RMD is due by April 1, 2025, based on your account balance on December 31, 2023, and
• Your second RMD is due by December 31, 2025, based on your account balance on December 31, 2024.

Has the age requirement changed?

The RMD age was 70½ before in was changed by Congress in The Secure Act 2.0. Now, it will remain at 73 until 2033 when it will increase to 75.

“To some extent, (the delay) is nice,” says Russell Hackman, president of Russell Hackman Wealth Partners in Boston, Massachusetts. “But to some extent it is kind of kicking the can down the road. Because sometimes that can make your future RMDs even bigger the longer you wait.

“So, we often talk to people about Roth conversion strategies, abilities to move money out of IRAs sooner, so you don’t get these huge RMDs down the line, depending on how much money people have,” he says.

How much do I have to withdraw?

The amount changes each year, according to your age and how much you have in your retirement savings. ​​Begin by adding up how much you had in all your tax-deferred retirement accounts as of Dec. 31 of the previous year. Then, find your age on the IRS uniform lifetime table and the corresponding “distribution period.” (An estimate of how many years you will be taking RMDs.)

Your RMD is calculated for each account by dividing the prior December 31 balance of that retirement account by a life expectancy factor that the IRS publishes in Tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Choose the life expectancy table to use based on your situation. You can also use an RMD calculator, like the AARP RMD Calculator.

According to an AARP Fact Sheet: If you’re 73, for example, the distribution period is 26½ years based on your life expectancy. ​​Divide your account balance by the distribution period. So, if you have $100,000 combined in all of your tax-deferred retirement accounts; $100,000 divided by 26 ½ is $3,773.58 — that’s the amount you must withdraw. If your combined state and local tax rate is 25%, you’ll owe $943 in taxes on your RMD.

I have multiple retirement accounts. Do I have to make withdrawals from all of them?

You can take your total RMD out of one account, or take bits from each one, so long as you withdraw the entire required minimum. “It can make it more confusing,” says Bond. “But I just tell my clients, this might be one reason to at this time maybe consolidate your IRAs. Because then it’s just only one tax reporting.”

Should I wait until December to make the required withdrawal?

No, says Bond. Take it out in November at the latest, just in case there a problem. Then you could be late and subject to the 25% tax penalty for late withdrawals. That could be reduced to 10% if the late withdrawal is corrected within two years, the IRS says.

What if you don’t need the money?

You can donate the money to charity through what is called a Qualified Charitable Contribution. Instead of taking the money from your retirement accounts, have it sent directly to the qualified charity of your choice. “That’s common for people who want to reduce their tax bills,” says Hackman.

Another option: “Very often we just reinvest the RMD in assets that can get a reasonable return without too much risk,” Hackman says. So, any RMD you don’t need to spend can be invested by your advisor in the right kinds of assets for you.”

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Rodney A. Brooks is an award-winning journalist and author. The former Deputy Managing Editor/Money at USA TODAY, his retirement columns appear in U.S. News & World Report and Senior Planet.com. He has also written for National Geographic, The Washington Post and USA TODAY and has testified before the U.S. Senate Special Committee on Aging. His book, “The Rise & Fall of the Freedman’s Bank, And Its Lasting Socio-economic Impact on Black America” was released in 2024. He is also author of the book “Fixing the Racial Wealth Gap.” His website is www.rodneyabrooks.com

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