If you're on the cusp of turning 73, it means you're soon coming up on a big milestone in the context of your retirement savings. And it's not necessarily a positive one.
Age 73 is when required minimum distributions, or RMDs, begin for many older Americans. It's important to know which retirement accounts of yours are subject to RMDs and what options you have for taking your first one on time.
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Which accounts force you to take RMDs?
If you have your retirement savings in a traditional IRA or 401(k), or a SEP or SIMPLE IRA, you generally have to start taking RMDs at 73. Roth IRAs and 401(k)s are not subject to RMDs.
If you have a traditional 401(k) but are still working, you may be able to delay your first RMD without incurring a penalty, provided you don't own more than 5% of the company. Otherwise, it's important to plan for that first RMD, since failing to take it on time could result in a costly 25% penalty.
Vanguard reports that almost 7% of its IRA holders missed their RMDs in 2024, incurring an average tax penalty of over $1,100. Ouch.
What options do you have for taking your first RMD?
RMDs generally need to be taken by Dec. 31 each year. But if this is your first one, there's an exception.
You can delay your first RMD to April 1 of the year after you turn 73 without being hit with a penalty. But in that case, you'll end up in a situation where you have to take two RMDs in the same calendar year, potentially leading to a bigger tax bill.
Plan for your first RMD so you don't lose money
If you're coming up on your initial RMD, the first thing to do is decide if you'll be taking it the year you turn 73 or pushing it out to the following year.
Once you've made that decision, you could talk to a financial professional about the timing of that distribution. They can tell you if it's beneficial to withdraw the money earlier in the year versus later, depending on factors that include your portfolio makeup and how your investments are doing.
The key, though, is to find out what needs to be done on your part for your RMD to get processed by the deadline. Many financial institutions have forms you can fill out online to make sure your RMD is taken on time. Pay close attention, because even though you get a little more leeway with your first RMD, it's important to have a good strategy for taking it.
