The IRS requires you to take money out of most types of tax-deferred retirement accounts (including Traditional IRA, SEP-IRA, and Simple IRA) when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022.) The same can be said for 401(k) and 403(b) accounts if you are no longer working. Roth IRAs do not require withdrawals until after the death of the owner. The annual RMD equals the quotient of the end of year balance of all applicable retirement accounts and your life expectancy factor provided by the IRS. To estimate your Required Minimum Distribution, use the calculator from Charles Schwab.
- Your first RMD is due by April 1st of the following year, and
- Your second RMD is due by December 31st.
Following this timeline, if you turn 73 in 2023, your first RMD (for tax year 2023) is due by April 1, 2024, and your second RMD (for tax year 2024) is due by December 31, 2024.
If an individual does not take their RMD or takes less than the required amount, they will be penalized up to 50% (or 25% depending on the tax year) of the required amount not taken.
Qualified Charitable Distribution – if you are charitably inclined, consider a qualified charitable distribution, or QCD. This strategy allows retirement account owners aged 70½ or older to transfer up to $100,000, tax-free, directly to charity each year. The QCD can count towards the owner’s RMD and reduces the taxable portion of the RMD.
Inherited RMD – If you inherit a retirement account, you will generally fall under one of two rules:
- Inherit prior to 1/1/2020 – required to distribute a minimum annual amount based on your life expectancy.
- Inherit after 12/31/2019 – required to distribute the balance within ten years of the decedent’s death. In addition, a minimum annual distribution may be required depending on the age of the decedent.
To read more about IRA withdrawals, click here.