Required minimum distributions (RMDs) are mandatory annual withdrawals the government makes you take from most retirement accounts beginning the year you turn 73. If you reached that milestone in 2024, you might still be a little unsure about what you have to do.
You may have already met your RMD requirement for the year, depending on how much you withdrew from your retirement accounts this year. But it's important to double-check that you've done it correctly. Failure to take your RMD can result in a 25% penalty tax on the amount you should have withdrawn. So make sure you understand the following three rules.
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1. Account owners have until April 1 to take their first RMD
Generally, you have to take RMDs by Dec. 31 of the tax year in question. But in the first year you're required to take RMDs, you actually have until April 1 of the following year to complete them. For example, if you turned 73 in 2024, you technically have until April 1, 2025 to take your 2024 RMD before the government hits you with a penalty.
But there are a few things to be cautious about here. First, this doesn't apply to those who have inherited an IRA from someone who died after 2019. If that's you, you still have to take your first RMD by Dec. 31, 2024.
Second, if you wait to take your first RMD until 2025, you will have to take two RMDs that year -- one for 2024 and one for 2025. Keep careful track of how much you've withdrawn from your accounts and which RMD your withdrawals count toward.
2. How the government calculates RMDs
Calculating your RMD for the year is fairly straightforward. All you have to do is figure out your total account balance at the end of the previous year -- 2023 in this case -- and divide it by the distribution period next to your age in the IRS's Uniform Lifetime Table. For example, if you're turning 73 this year and you have a retirement account with a balance of $100,000 at the end of 2023, you'd divide $100,000 by the 26.5 distribution period for 73-year-olds, giving you an RMD of about $3,774 from that account for 2024.
Things get a little more complicated when you consider the unique rules that apply to each type of retirement account. For starters, you don't have to take RMDs from Roth accounts, regardless of your age. You also don't have to take RMDs from your current employer's workplace retirement account as long as you own less than 5% of the company. RMDs for this account begin in the year after you retire.
IRAs enable you to take all your RMDs from a single account. For example, if you have one IRA with a $4,000 RMD and another with a $6,000 RMD, you can take $10,000 from one, $5,000 from each, or any combination you like as long as it totals $10,000.
401(k)s don't allow this. You must take your 401(k) RMDs individually. So in the case of two 401(k)s, one with a $4,000 RMD and one with a $6,000 RMD, your only choice to avoid the penalty would be to withdraw at least $4,000 from the first and at least $6,000 from the second. However, if you rolled one 401(k) over into the other, you could simplify your 401(k) RMDs in future years.
3. Qualified charitable distributions (QCDs) can help you avoid RMDs
Sometimes you really don't want to take an RMD because you don't need the money and you don't want to raise your tax bill. But you also don't want to deal with the penalty that comes from skipping RMDs. That's where qualified charitable distributions (QCDs) come in.
This is where you donate the amount of your RMD to a qualifying charitable organization via a direct transfer from your retirement account. It's important that the money not pass through your hands first. If you do this, you'll still have to withdraw some money from your retirement account, but it won't affect your tax bill at all.
If you plan to do a QCD, keep a receipt proving you donated. You don't have to submit this with your taxes, but if the IRS ever decides to audit you, it could disallow the QCD if you can't prove you made it.
Understanding these rules should help you avoid major mistakes with your RMDs. But if you have any questions, consider consulting a tax professional who can give you personalized advice.
