It's smart to read up on important retirement topics as you inch closer to not working for a living anymore. The more you know, the better decisions you'll likely make, and that can help you keep more money in your coffers.
One key topic to understand well is the required minimum distribution (RMD). It's vital to be familiar with RMDs, because the penalty for not taking them on time is steep.
Image source: Getty Images.
Meet the RMD
Here's how the Internal Revenue Service itself defines RMDs: "Required minimum distributions (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."
Not only will you need to take your RMDs from certain retirement accounts, but you'll also have to include those withdrawals in your taxable income. Remember, after all, that Roth accounts are funded with post-tax money, but traditional accounts offer an up-front tax break in exchange for taxation later. An RMD withdrawal is an example of that later taxation.
If you want to calculate your RMD, you'll need to refer to an RMD table. Many good brokerages will calculate your RMDs for you and will often let you set up automatic withdrawals.
The rules regarding RMDs change now and then. Here's a recap of recent changes.
1. Roth 401(k)s are now RMD-exempt
It used to be that traditional IRAs and traditional 401(k)s -- and also Roth 401(k)s -- were subject to RMDs. Roth 401(k)s have joined Roth IRAs now in not requiring RMDs. This rule actually went into effect in 2024, but it's rather critical, so I'm mentioning it here, lest anyone remain unaware.
2. Onerous penalties have shrunk
I mentioned a "steep penalty" for those who fail to take their RMD on time. Well, it used to be even steeper. In the recent past, if you missed the deadline, the penalty was fully 50% of the sum you failed to take on time. That's a big deal, because many people have RMDs of $4,000, $6,000, $8,000, or more. So they would have been looking at multi-thousand-dollar penalties. Yikes!
The good news is that the penalty has been slashed in half -- to a still-rather-steep 25%. And here's some even better news: If you catch your mistake and withdraw within two years, the penalty may be reduced to 10% -- once you file Form 5329.
3. Rules have changed for inherited traditional accounts
Speaking of penalties, they may surprise some people who inherit IRAs. Per some new rules, some beneficiaries will be required to take RMDs from inherited IRAs -- depleting them within 10 years. This rule doesn't apply to spousal heirs, but does apply to most heirs who were not married to the IRA owner who died -- if that IRA owner had reached age 73 before dying.
These rules are tricky, so if you think they apply, read up on them. Note, too, that those who fail to comply with this new rule that few people even know about can be on the hook for penalties. Yikes!
4. You can donate more to charity via your RMD
Many retirees have long been able to donate to charities from their retirement accounts, generally by having a sum routed directly from their account to a qualifying nonprofit organization. This is a Qualified Charitable Distribution (QCD), and it can be a handy way to donate to causes you believe in. A QCD:
- Counts toward your RMD
- Won't count as a charitable donation deduction come tax time
- Won't count as taxable income to you
The QCD was introduced beginning with the 2006 tax year, and the limit was set at $100,000. That sum didn't change for nearly 20 years, but it now will be adjusted for inflation regularly. For 2025, the cap is raised to $108,000.
5. The RMD beginning age has changed
The age at which you used to have to start taking RMDs was 72, but it has since been increased to 73 -- and is scheduled to be 75 by 2033. There has been confusion for those born in 1959, but that has now been clarified: Anyone born in 1959 will have to start taking RMDs at age 73.
