The government offers retirement savers a pretty good deal if they use certain retirement accounts like a 401(k) or IRA. Traditional accounts let many people get deductions on contributions upfront, letting you wait to pay taxes when you take distributions. That can give you more money to invest today.
But the government won't let you delay your tax bill indefinitely. Eventually, you'll have to start taking money out of your retirement accounts. Once you reach a certain age, the government imposes required minimum distributions, or RMDs, on your accounts each year. You'll have to pay income taxes on the amount you withdraw. Those with inherited IRAs usually have to take RMDs as well.
If you don't know all the rules for required minimum distributions, you could face some stiff penalties. Failing to take the full required minimum distribution on time could result in a penalty of up to 25% of the amount you were supposed to withdraw. On top of that, you'll still be required to take the distribution and pay taxes.
As we begin 2025, there are a few important details everyone needs to know about RMDs.
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How the government calculates your RMD
The most important detail for anyone with a retirement account to understand is how the government calculates your required minimum distribution. There are at least two things that go into calculating your RMD:
- Your account balance(s) at the end of the previous year
- The age you'll reach this year
The IRS publishes a table of life expectancy factors, which is a number based on how much longer a person at each age can expect to live. There's a third factor that can come into play here. If your sole beneficiary on the account is your spouse and they're more than 10 years younger than you, you'll use the joint life expectancy factor table. You'll look up the applicable life expectancy factor based on both your and your spouse's ages. Everyone else will use a uniform life expectancy factor.
Once you have the correct life expectancy factor, all you have to do is divide each of your account balances at the end of the previous year by the factor. That's your RMD.
It's important to note you cannot combine RMDs for many accounts. If you have an old 401(k) account, the RMD for that account will be separate from your RMD for your traditional IRA if you have one. You must withdraw each account's RMD from that specific account.
The only exception is if you have multiple traditional IRAs. You can aggregate the total RMD amounts from those accounts and withdraw that amount from a single IRA. However, you cannot combine RMDs for you and your spouse. Each must take distributions from their own accounts.
When do required minimum distributions start?
Anyone turning 73 in 2025 will have to start taking required minimum distributions. RMDs are typically due by the end of the calendar year. However, your first distribution isn't due until April 1 of the following year. That means anyone who turned 73 in 2024 but hasn't taken their RMD(s) yet still has time to do so before the deadline.
All RMDs after your first are due by Dec. 31 each year. That means if you opt to wait until April 1 to take your first RMD, you'll have to take two RMDs in the same year. That could result in a significant tax bill since each distribution counts as regular income in the year its made. As such, it's often beneficial to take your first RMD in the year you become subject to them.
The RMD age has changed significantly over the last few years due to the Secure Act and Secure 2.0 Act. The Secure 2.0 Act raised the age to 73 and also laid the groundwork for another increase in a few years. Anyone born in 1960 or later will have until the year they turn 75 to start taking RMDs.
Inherited IRAs often come with RMDs, too
If you inherit an IRA, you may have multiple options for how to treat that account.
Spousal beneficiaries are usually able to roll over the account into their own IRA. This is often beneficial, but it's worth consulting a professional about your personal situation. The only exception to this rule is if you inherited the account from your spouse before 2020 and after they were already subject to RMDs. Then you must take RMDs based on your own life expectancy.
If you inherited an IRA from someone other than your spouse before 2020, you're subject to RMDs based on your own life expectancy. There was also the option to fully deplete the account within five years if you inherited it from someone before they were subject to RMDs. Note, anyone who chose this option should have depleted the account by now.
The Secure Act instituted new rules for inherited IRAs after 2020. Non-spouse beneficiaries, with few exceptions, are now required to deplete the entire account within 10 years. Importantly, if the deceased account holder was already subject to RMDs before they passed, all beneficiaries must continue making RMDs each year.
The IRS waived the RMD requirement for inherited IRAs in the years 2021 through 2024 due to confusion about the new law. However, it made an official ruling that starting in 2025 the RMD rules still apply on top of the new 10-year requirement to deplete the entire account.
If you've inherited an IRA since 2020 make sure you're set up with your financial institution to take an RMD this year. And if you're subject to the new 10-year rule, make sure you have a plan to deplete the entire account by the deadline.
