Do you have retirement savings? Here’s what you need to withdraw before new laws or changes drastically affect you

Do you have retirement savings? If so, there’s a rule you absolutely need to keep in mind. It’s called Required Minimum Distributions (RMDs), and it’s crucial if you have accounts like a 401(k) or an IRA.

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Simply put, RMDs are the minimum amounts the IRS requires you to withdraw each year from your retirement savings. The reason? To ensure that taxes are paid on that money before you start using it.

What are RMDs in retirement?

Think of your retirement savings as a big jar of candy you’ve been storing away for years. The IRS steps in and says, “You can’t keep that jar full forever. You need to start taking some candy out each year—and don’t forget to give me a cut for every piece you take.” Fair enough? Well, that’s up for debate.

The interesting part is that it doesn’t matter if you actually need the money. By law, once you hit age 73, you’re required to start making withdrawals. And if you were born in 1951, there’s an important date to remember: April 1, 2025. That’s the deadline to take your first RMD.

What is the purpose of RMDs?

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RMDs are designed to generate tax revenue for the government and prevent individuals from holding excessively large sums in their retirement accounts indefinitely. Many wealthy retirees and investors don’t rely on their retirement savings for daily expenses and might otherwise avoid withdrawing from these accounts. By requiring a minimum amount to be withdrawn each year, the IRS ensures that some of this money is taxed.

Who is affected by this?

To keep it simple, here’s a quick rundown:

• Anyone with a traditional IRA.
• Those who have SEP IRA or SIMPLE IRA accounts.
• Participants in retirement plans such as 401(k),
• Roth 401(k), 403(b), or 457(b).

Here’s something important to note: If you’re still working and have an employer-sponsored retirement plan, you can delay taking your RMDs until you retire. However, there’s one exception—if you own more than 5% of the company, the rules are different.

Also, Roth accounts within a 401(k) or 403(b) followed the RMD rules in 2023. But starting in 2024, there’s good news! These accounts will no longer require RMDs as long as the account owner is alive.

How to calculate the minimum withdrawal amount

The calculation might sound tricky, but it’s actually pretty straightforward. You take the balance of your account at the end of the previous year and divide it by your life expectancy. Wondering how to figure out your life expectancy? Don’t worry—you don’t need to be a fortune teller. The IRS provides specific tables on their website to guide you.

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The formula might seem a bit technical since it’s based on your age, gender, and some statistical calculations that feel straight out of a math textbook. Simply put, the younger you are when the calculation is made, the smaller the percentage you’re required to withdraw.

While the details might seem dry or overly complex, this is something you don’t want to overlook. Ignoring RMD rules can be costly, as the IRS imposes steep penalties for noncompliance. If you’re unsure about anything, it’s a good idea to consult your financial advisor or refer to the IRS guides. Isn’t it better to play it safe than risk running into trouble with the tax authorities?

What Happens if You Miss an RMD?

Missing an RMD or failing to withdraw the full amount can come with a hefty penalty—50% of the amount you didn’t take. For example, if your RMD is around $50,000 per year, failing to withdraw it could result in a $25,000 penalty. That’s a significant reason to take this rule seriously! Ultimately, it’s the taxpayer’s responsibility—not the financial custodian’s or planner’s—to ensure the RMD is taken on time.

Important Deadlines

You must take your first RMD by April 1 of the year after you turn 73 (72 for those born before January 1, 1951). After that, RMDs must be withdrawn by December 31 each year.

If you’re still working at age 73 and contributing to an employer-sponsored retirement plan, you might not need to take an RMD from that specific plan until you retire. However, RMD rules still apply to other accounts, such as Traditional IRAs or 401(k)s from previous employers.