You'd think the money you worked hard to save would be yours to manage as you see fit. But the IRS imposes some pretty strict rules on traditional retirement accounts like IRAs and 401(k).
For one thing, if you tap a traditional IRA or 401(k) before turning 59 and 1/2, you'll typically face an early withdrawal penalty. And later in life, you'll be forced to start taking mandatory withdrawals known as required minimum distributions, or RMDs.
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Ignoring your RMDs could have very serious consequences, though. So, it's important to understand when you need to start taking those withdrawals and what specific deadlines you need to be mindful of.
How RMDs work
Once you turn 73 (or 75 for younger workers), you need to start taking RMDs from your traditional retirement accounts. Your first RMD can be delayed to April 1 of the year after you turn 73. But from there, all subsequent RMDs must be taken by Dec. 31 each year.
So, let's say you're turning 73 this May. You could take your first RMD in 2026, but you don't have to. You could push it to 2027, but then you'll have two RMDs to take next year.
If you don't take your RMDs on time, you'll risk a 25% penalty on whatever sum you fail to remove from your savings. In the case of a large RMD, that penalty could be costly.
A $12,000 RMD you don't take, for example, will cost you $3,000. That's money you're basically throwing away.
How to avoid RMD penalties
Since RMD penalties can be steep, the best way to avoid them is to:
- Know when RMDs start.
- Understand RMD deadlines.
- Set up automatic distributions so that money comes out of your various accounts when it needs to.
Most financial institutions let you automate RMDs. And you can often arrange for those withdrawals to happen on a schedule that works for you (such as monthly versus quarterly versus a single lump sum).
If, for some reason, your account doesn't offer automatic RMDs, don't wait until the very end of the year to take those withdrawals. December tends to be a busy time due to the holidays. And the last thing you need is an end-of-year illness sidelining you and causing you to forget your RMD.
If you can't put your RMDs on autopilot, make a note on your calendar to withdraw your money ahead of the year-end crunch. Or work with a financial advisor to come up with a withdrawal schedule that works well for you. The key is not to lose money due to sheer forgetfulness.
