Things You Should Know About RMDs if You Are Turning 73
Retirement accounts like the 401(k) and the Individual Retirement Account (IRA) are broadly classified as traditional, and Roth based on their taxability. Roth accounts are taxed on contributions, allowing for tax-free distributions later. Conversely, traditional accounts are taxed on withdrawals, enabling tax-free contributions. In the case of the latter, to ensure that all individuals pay taxes, the rules mandate all account owners withdraw money under Required Minimum Distributions (RMDs). RMDs commence at a specific age (73 as of 2024) and direct you to draw a particular minimum amount based on your age and life expectancy, according to the Internal Revenue Service (IRS) tables. As the name suggests, RMDs are mandatory, which is why it is essential to understand the best strategy for taking them.
A financial advisor can help devise a suitable strategy for taking RMDs based on your needs and goals. This article will also focus on key aspects you should know about RMDs if you are turning 73.
Below are 9 things to know about RMDs if you are turning 73:
1. What are the applicable accounts for RMDs?
Traditional IRAs, Rollover IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, Simplified Employee Pension (SEP) IRAs, 401(k) plans, 403(b) plans, Governmental 457(b) deferred compensation plans, and SIMPLE 401(k) employer-sponsored retirement plans all require RMDs.
2. What month should I take my RMD?
The month in which you must start taking RMDs from your retirement accounts depends on your date of birth. If you were born before July 1, 1949, your RMD age is 70.5 years. For those born between July 1, 1949, and December 31, 1950, the RMD age is 72 years. If your birthday falls between January 1, 1951, and December 31, 1959, your RMD age is 73 years. However, if you were born after January 1, 1960, you can wait until you are 75 to begin taking RMDs. The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, enacted in December 2022, raised the required age for RMDs to 73 years for individuals who turn 73 between 2023 and 2032.
While the general age to withdraw your RMDs is 73 years as of 2024, you must also know the exact month when you must draw your funds to avoid a penalty. As per the IRS regulations, your first RMD should be taken by April 1 of the year you turn 73. April 1 is known as the Required Beginning Date (RBD). You must make the first withdrawal on the RBD. So, if you are turning 73 this year, you have until April 1, 2025, to take your first RMD from your retirement accounts. In the case of an employer-sponsored plan, if you are still employed at the age of 73 and you have funds in the account through your current job, you may be able to postpone taking distributions from that account until April 1 of the year following your retirement. However, this is subject to the provisions of the specific plan. However, in the case of an IRA, you must withdraw your funds regardless of whether you are still working or retired if you are 73.
Once you have taken your first RMD, you need to make the second withdrawal by December 31, 2025. After the first two RMDs, you can withdraw the rest of your funds by December 31 every year for as long you live or if the account holds any money. All your distributions can be withdrawn in a lump sum or at your required frequency throughout the year. You can decide on the best course of action according to your needs. However, you must withdraw the minimum stipulated amount for the year in total.
It is important to understand these dates and not get confused between them. In many cases, people omit April 1 and assume all withdrawals, including the first, must be made by December 31. However, this can lead to double taxation. Most people take their first required withdrawal from their retirement account by December 31 of the year they turn 73. If they wait until April 1 of the next year to take it, they will have to take another withdrawal by December 31 of that same year. So, they end up taking two withdrawals in one year, which means they will have to pay taxes on both withdrawals.
3. How do RMDs work in the case of multiple retirement accounts?
Understanding the RMD requirement, especially with multiple accounts, can be confusing. Generally, when it comes to RMDs, you must calculate and withdraw funds for each account, whether it is an IRA or a 401(k). However, it is important to note that each account can have its own specific set of rules.
In the case of IRAs, the IRS stipulates that while you need to compute the RMD from all your IRAs for a year, you can add up all the RMDs from all accounts and withdraw the sum from a single IRA if you wish. Alternatively, you can make separate RMDs from each of your IRAs. This flexibility allows you to streamline your savings and differentiate between your accounts. It also makes sense if you have multiple accounts and wish to leave a specific account in your will to your spouse or other family member.
On the other hand, with a 401(k), the rules differ drastically. You must calculate and withdraw RMDs from all your 401(k)s individually. There is no option to combine them all and withdraw from just one. This can make the process more complex, as you would have to calculate the RMDs from each account, which can differ based on their individual balances. Additionally, it means you must keep track of all your accounts and ensure you withdraw from each. Missing even one withdrawal could result in a penalty for that account for the year concerned. This rule applies to other defined contribution plans as well, except for 403(b).
4. How does the IRS know your RMD amount?
To calculate your RMD for each retirement account, you can divide the balance of that account as of December 31 of the previous year by a factor called life expectancy. This life expectancy factor is determined by the IRS and can be found in their publications.
Which life expectancy table you use depends on your situation, as explained below:
a. If your spouse is the sole beneficiary of the account and is over ten years younger than you, you need to use the Joint and Last Survivor Table II.
b. If your spouse is not the sole beneficiary or is not more than ten years younger than you, you need to use the Uniform Lifetime Table III.
c. If you are a beneficiary of an account, such as an inherited IRA, you must use the Single Life Expectancy Table I.
The IRS also provides worksheets to help you calculate your RMD account each year. Additionally, you can also get assistance from a financial advisor. The stakes are typically high when withdrawing your money. Ultimately, the responsibility for taking the correct RMD amount falls on the account owner. So, you must ensure you make correct withdrawals. Any error can lead to high taxes and penalties. Therefore, you may get help from a financial advisor to eliminate the scope of errors and arrive at the right amount for every account and year.
5. How to calculate tax on RMDs?
When you withdraw your RMD from your retirement account, the amount you take out is subject to income tax at your regular income tax rate. It is added to your taxable income for the year and taxed as per the tax slab you fall into. The prevailing income tax rates as of 2024 are as follows:
| Tax rate | Single filers | Head of household | Married filing jointly | Married filing separately |
| 10% | $0 to $11,600 | $0 to $16,550 | $0 to $23,200 | $0 to $11,600 |
| 12% | $11,601 to $47,150 | $16,551 to $63,100 | $23,201 to $94,300 | $11,601 to $47,150 |
| 22% | $47,151 to $100,525 | $63,101 to $100,500 | $94,301 to $201,050 | $47,151 to $100,525 |
| 24% | $100,526 to $191,950 | $100,501 to $191,950 | $201,051 to $383,900 | $100,526 to $191,950 |
| 32% | $191,951 to $243,725 | $191,951 to $243,700 | $383,901 to $487,450 | $191,951 to $243,725 |
| 35% | $243,726 to $609,350 | $243,701 to $609,350 | $487,451 to $731,200 | $243,726 to $365,600 |
| 37% | $609,351 or more | $609,350 or more | $731,201 or more | $365,601 or more |
While the RMDs are compulsory and there is no way to eliminate the tax, you can somewhat lower your liability. The first way to do so is by moving all or a portion of your money into a Roth IRA. With a rollover, you will pay taxes on the amount you move to the new account now, but all future withdrawals from the Roth IRA will be tax-free. This can be helpful for your own use later or to pass on to your heirs. Employed individuals with a 401(k) who plan to work in the future can choose not to withdraw their funds until they are employed. If you are employed after the age of 73, you do not have to withdraw your RMDs until you wish to. Lastly, you can itemize your tax deductions and increase other deductions like charitable contributions or medical expenses. These can lower your overall taxes.
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6. Do RMDs reduce Social Security?
Social Security benefits can be taxed up to 85%. The tax you pay on Social Security depends on your tax filing status and your total income, which is a sum of your Adjusted Gross Income (AGI), any nontaxable interest you receive and half of your Social Security benefits.
If you are single, here’s what you need to know:
a. If your total combined income is less than $25,000, you will not pay taxes on your Social Security benefits.
b. If your total combined income is between $25,000 and $34,000, you may pay tax on up to half of your Social Security benefits.
c. If your total combined income is more than $34,000, you may pay tax on up to 85% of your Social Security benefits.
If you are married and file jointly, the limits are a bit higher:
a. If your total combined income is less than $32,000, you will not pay taxes on your Social Security benefits.
b. If your total combined income is between $32,000 and $44,000, you may pay tax on up to half of your Social Security benefits.
c. If your total combined income is more than $44,000, up to 85% of your Social Security benefits may be taxed.
When you take RMDs from your retirement accounts, it can increase your taxable income. This can affect certain calculations for Social Security and Medicare. For Social Security benefits, if your RMDs push your total income above certain thresholds, a part of your Social Security benefits might be taxed. Essentially, the more income you have, including RMDs, the more likely it is that you will owe taxes on your Social Security benefits. Similarly, if your income, including RMDs, is higher, you might have to pay higher Medicare premiums. Medicare Part B premiums are decided on your income, so if your income goes up due to RMDs, your Medicare premiums might also increase.
7. How do you make withdrawals from inherited accounts?
There are different types of inherited IRAs. The rules for RMDs can differ for each of these types. Here’s what you need to know:
a. Spousal 401(k): There are two options available in the case of spousal 401(k)s. The first is to keep the money in the plan. However, you can do so only if the company offering the account allows it. The second option is to roll over the 401(k) assets into an inherited IRA. It is important to note that the company sponsoring the account may have their own set of rules about how the money within the account must be withdrawn. In this case, you need to follow their guidelines.
b. Non-spousal 401(k): You can roll over the funds to an inherited IRA as a non-spousal beneficiary.
c. Spousal Roth IRA: Spousal Roth IRAs do not have RMDs as the account owner has already paid tax on them when making contributions.
d. Spousal traditional IRA: You have multiple options in the case of spousal traditional IRAs. You can either roll over the assets into an inherited IRA or to your own IRA if you have one. In the case of the former, your RMD will be calculated based on the IRS Single Life Expectancy Table. You can use your age and life expectancy factor to determine the RMD amount. RMDs from an inherited IRA must commence based on your spouse’s age at the time of their passing and not yours.
If you choose to roll over the fund to your own IRA, you can use the Uniform Life Expectancy Table to calculate the RMD amount. The RMDs, in this case, will commence as per your age.
e. Non-spousal traditional IRA: If you inherit an IRA, you typically have to start taking RMDs by December 31 of the year after the original owner’s death. The amount you need to withdraw is calculated using the IRS Single Life Expectancy Table. If the original owner died before taking an RMD, you calculate your RMDs based on your age at the end of the year after their death. You subtract figure “1” from the initial life expectancy factor each year to calculate subsequent RMDs.
It is important to note that the SECURE Act brought in some changes to retirement accounts, one which now mandates beneficiaries to withdraw all the funds within an inherited IRA within ten years of the original owner’s death. The only exception to this rule is an exemption for minors and disabled or chronically ill individuals. If the beneficiary is a child under 18, they can wait until they become adults to withdraw the money. The choice rests with disabled or chronically ill individuals. If you are not more than ten years younger than the original account holder when they passed away, you are also exempt from the new SECURE Act rules.
Inherited IRAs can also have multiple non-spouse beneficiaries. Many times, parents may leave the account to more than one child or grandchild. In such a case, each beneficiary needs to set up their own inherited IRA by December 31, the year the original account owner died. Otherwise, they must follow the RMD schedule based on the oldest remaining beneficiary as of December 31.
f. Non-spousal Roth IRA: The ten-year rule also applies to non-spousal Roth IRAs. This means you need to withdraw all the money from the inherited Roth IRA within ten years of the original owner’s death. In addition to this, the inherited Roth IRA also has a five-year rule. According to the rule, you must withdraw the entire value of the account by December 31 of the tax year containing the fifth anniversary of the original owner’s death. If the inherited Roth IRA has been around for more than five years, all withdrawals, including both contributions and earnings, are tax-free. However, if it is less than five years, earnings are taxable when withdrawn, although contributions are not taxed.
8. What happens if you do not make any RMDs?
Taking out the correct amount on time is crucial to avoid penalties for not withdrawing the required amount from your retirement accounts. If you miss a withdrawal, the IRS can charge you a 25% penalty tax on the amount you should have withdrawn. However, if you realize your mistake within two years, the penalty drops to 10% when corrected.
Fortunately, if there is a valid reason for the error, the IRS may grant a waiver of the penalty. To request a waiver, you can simply submit a letter with your Form 5329 explaining the situation. While there are no guarantees, it is possible to obtain a waiver if you have a reasonable explanation for the oversight.
9. Do you have to spend the RMD money?
Often, the RMDs may feel obligatory, especially if you do not have an immediate need for the funds. The RMD amount is determined by factors such as your age and the account balance. If you find yourself mandated to withdraw more than you currently require, you have the option to leave the excess funds in your account. Once the RMD is withdrawn, you have the flexibility to manage the money as you see fit. You can choose to store it in your bank account or keep it in cash, depending on your preference. There are no specific rules dictating how you must utilize this money. The IRS only requires the withdrawal to ensure timely tax collection.
After taxes are deducted, you have the freedom to allocate the remaining funds as you wish. You can opt to spend, donate, save, or invest. The choice is yours. A lot of people use the money from their taxable RMDs to open a Roth IRA. This offers the potential for growth with any future tax liabilities. Moreover, since the Roth IRA is an effective estate planning tool, using it at this stage of your life allows you to leave a legacy behind for your loved ones, minus the tax hassles.
To conclude
Knowing the RMD schedule and making your distributions on time can significantly simplify the process of withdrawal. It ensures that you get to utilize your years of savings without wasting them away in taxes and penalties. However, it is important to note that the rules surrounding RMDs can change over time. Additionally, the calculations can be complex, as they are influenced by factors such as the account, your life expectancy, and your individual situation, which determine the table used for determining the amount. Therefore, it may be advisable to seek help from a financial advisor.
Use the free advisor match service to get matched with vetted financial advisors who can help advise what things to keep in mind when drawing your RMDs. Simply answer a few questions about your financial needs, and our free match tool can match you with 2 to 3 advisors suited to provide guidance toward your financial goals.
For additional information on RMD options and how they work, visit Dash Investments or email me directly at dash@dashinvestments.com.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.
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