At the age of 73, tax law requires you to begin taking withdrawals — called Required Minimum Distributions (RMDs) — from your traditional IRA, SIMPLE IRA, SEP IRA and 401K/403b Plans. It’s important to understand the rules behind RMDs, which can be quite complex. In this article, we address the most common questions to help you navigate this process.
Answers to Frequently Asked Questions Regarding Required Minimum Distributions
What are the tax implications if I want to withdraw money before retirement?
At the age of 59½, you can start taking money out of your IRA without penalties. If you need to take money out of a traditional IRA before age 59½, distributions are taxable, and you may be subject to a 10% penalty tax. However, there are several ways that you can avoid the 10% penalty tax (but not the regular income tax).
They include using the money to pay:
- Qualified higher education expenses,
- Up to $10,000 of expenses if you’re a first-time homebuyer,
- Expenses after you become totally and permanently disabled,
- Expenses of up to $5,000 per child for qualified birth or adoption expenses, and
- Health insurance premiums while unemployed.
These are only some of the exceptions to the 10% tax allowed before age 59½. The IRS lists them all in this chart.
When am I required to take my first RMD?
Your first RMD is required to be taken no later than April 1st of the year following the year you turn 73, regardless of your employment status. For example, if you turn 73 in 2025, your first RMD will need to be made by April 1st, 2026. This was changed from age 72 in 2023 with the Secure 2.0 Act.
How do I calculate my RMD?
Your RMD can be calculated by taking your account balance at the end of the preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Tables.” A portion of the IRS Table is shown below:
Age | Distribution Period (Years) |
|---|---|
73 | 26.5 |
74 | 25.5 |
75 | 24.6 |
76 | 23.7 |
77 | 22.9 |
78 | 22 |
79 | 21.1 |
80 | 20.2 |
81 | 19.4 |
82 | 18.5 |
83 | 17.7 |
Information from Internal Revenue Service
These uniform lifetime tables consider your age and provide an average life expectancy to calculate your RMD. A separate table is required to be used if the sole beneficiary of the IRA is the owner’s spouse who’s 10 or more years younger than the owner.
How should I take my RMDs if I have multiple accounts?
If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you can choose to take the full amount of your RMD any way you would like. This can be a single distribution for the full amount from one of your IRAs or multiple equal distributions across all your IRAs.
Can I withdraw more than the RMD?
Yes, you can always withdraw more than the RMD, but you can’t apply excess withdrawals toward future years’ RMDs, which is important to keep in mind.
When preparing to take RMDs, you should weigh your income needs against the ability to keep the tax shelter of the IRA going for as long as possible.
Can I take more than one withdrawal in a year to meet my RMD?
You may withdraw your annual RMD in any number of distributions throughout the year, as long as you withdraw the yearly total minimum amount by December 31 (or April 1 if it is for your initial RMD at age 73).
What happens if I don’t take an RMD?
If the distributions to you in any year are less than the RMD for that year, you’ll be subject to an additional tax equal to 50% of the remaining amount of RMD that wasn’t distributed.
Planning for a better future
Choosing to invest in an IRA can be one of the most important decisions for your financial future which can also be very stressful, if you aren’t properly informed. Please contact your Wegner Tax Advisor to review your traditional IRAs and analyze other retirement planning aspects. We can also discuss who you should name as beneficiaries and whether you could benefit from a Roth IRA which operate under a different set of rules including qualified distributions generally being tax-free.
