Born between the years of 1946 and 1964, the Baby Boomer generation has lived through significant societal milestones — from the counterculture of the 60s and the Vietnam War, through the moon landing, the Cold War, the invention of the internet, 9/11, the Great Recession, and beyond.
Now, more and more Baby Boomers are experiencing a new milestone: They’re turning 73.
Compared to the rest of the list, “milestone” might seem like a bit of an overstatement, but it’s an important age in the realm of retirement planning. This is the age when you’re mandated to begin taking required minimum distributions (RMDs) from most retirement accounts.
What are Required Minimum Distributions (RMDs)?
Required Minimum Distributions are the minimum amount that retirees must withdraw each year from certain types of retirement accounts, starting at age 73.
The idea behind RMDs is that the government has given you the opportunity to enjoy decades of tax-deferred growth on your investments in your IRA, 401(k), and other qualified retirement accounts. Once you reach age 73, Uncle Sam is ready to begin cashing in on those deferred taxes by forcing you to start taking distributions.
What are the rules of RMDs?
The rules surrounding RMDs can seem arcane, especially if you’ve never taken one before. Keep in mind that there are plenty of caveats and exceptions to the “rules” we’re outlining here.
If you need help figuring out the specifics of RMDs, we recommend working with a qualified financial advisor.
How are RMDs calculated?
The amount you must withdraw varies from year to year and is based on a percentage of the total assets you hold that are subject to RMD rules. In general, you determine this percentage using your life expectancy, and the IRS’s “Uniform Lifetime Table”.
Note that you calculate the total RMD across all of your eligible accounts and can withdraw from any combination of them, except where certain plan rules require otherwise.
So, for example, let’s say you recently turned 73, which means it’s currently the first year you must take RMDs. By using the IRS’s Uniform Life Table, you can calculate that you’ll have to withdraw about 3.77% of your eligible assets for your first RMD. Someone who’s 75 this year will have to withdraw about 4.07% of their assets.
Which Retirement Accounts Have RMDs?
Generally, RMD rules apply to all employer-sponsored retirement plans, including traditional 401(k)s, 403(b)s, and 457(b)s, as well as traditional IRAs. Additionally, SEP and SIMPLE IRAs, which are often used by small business owners and self-employed individuals, are also subject to RMDs.
Notably, Roth IRAs are the exception: They do not require RMDs during the account owner’s lifetime, because they are funded with after-tax dollars. However, even though Roth 401(k)s are also funded with after-tax dollars, they are subject to RMDs. You can avoid this by rolling the funds in your Roth 401(k) into a Roth IRA (which is something you should only do with the help of a comprehensive financial advising team).
How to take your first RMD: A Timeline
To help illustrate the process of taking your first RMD, let’s pretend you turned 73 this March (assume it’s currently September 2024). This means you are required to take an RMD for 2024, but you have until April 1, 2025, to actually make that distribution. After your first RMD, all subsequent RMDs must be made by December 31.
Keep in mind that if you do wait until the last minute to take your first RMD (which, in the above example, would be April 1, 2025), you’ll have to take two RMDs during that calendar year (one at the end of your birthday month, and another by the end of the year). After that, though, you’d just be required to take one per calendar year.
RMDs and Prior Distributions
Another common point of confusion around RMDs is if any distributions made prior to turning 73 count towards your first RMD. In other words, if you turn 73 in March 2024, and you made a distribution in February 2024, would that count towards your 2024 RMD?
The answer is yes — any distributions made during the year you turn 73 counts towards your retirement, whether they occur before you reach age 73 or afterwards.
RMD Deadlines and Penalties
Missing an RMD deadline can be costly. If you don’t take your RMD by the required deadline, the IRS imposes a steep penalty. Historically, this penalty was 50% of the amount you were supposed to withdraw but didn’t. However, as of the passage of the SECURE Act 2.0, this penalty has been reduced to 25%, and if you take corrective action within a specified “correction period”, the penalty is further reduced to 10%. Regardless, it’s important to plan ahead and ensure you meet the deadlines to avoid these unnecessary costs.
If you have questions about how to integrate RMDs as a part of your tax-smart retirement portfolio, ask your financial advisor to help you navigate. They have the tools necessary to make sure you’re taking your RMD in the most efficient manner possible, and to help ensure you’re prepared to make RMDs for many years to come.
