Millions of Americans hit a birthday this year that changes how their retirement accounts behave, whether they feel ready or not.
At age 73, the IRS stops letting certain tax-deferred accounts sit untouched forever.
Required minimum distributions, or RMDs, force withdrawals from traditional IRAs and most 401(k)s, and the penalty for skipping one is a 25% excise tax on the amount you should have taken.
The rule exists because Uncle Sam waited decades for his cut.
You dodged taxes on the money going in, so the government wants taxes on the way out.
The problem is timing: RMDs kick in right when many retirees are trying to stretch savings through high grocery bills, rising rent, and credit card APRs that still sit above 20%.
Your RMD is calculated by dividing your account balance at the end of the prior year by a life expectancy factor from IRS tables.
At 73, that factor is about 26.5, so a $500,000 IRA requires roughly $18,900 withdrawn that year.
That full amount lands in your taxable income, even if you do not need the cash.
A forced withdrawal can push you into a higher bracket, increase what you pay for Medicare Part B and Part D through income-related monthly adjustment amounts, and make more of your Social Security taxable.
Retirees who planned carefully for years can watch their effective tax rate jump in a single filing season.
The first-year deadline trips up plenty of people.
You can delay your very first RMD until April 1 of the following year, but then you owe two distributions in the same calendar year.
That stacks income, which can trigger the Medicare surcharge and bracket creep in one ugly tax return.
Most financial planners suggest taking year one on schedule to avoid the pileup.
The 2019 SECURE Act pushed the starting age from 70½ to 72, and later legislation moved it to 73, with 75 arriving in 2033.
If you are still working and own a 401(k) at that employer, you may qualify for a delay until you actually retire.
Roth IRAs never require withdrawals during your lifetime, which is why more savers are converting traditional balances now while rates are known.
The IRS can reduce the 25% penalty to 10% if you take the missed amount and file Form 5329 promptly.
The agency has also waived penalties in recent years for people who stumbled through rule changes.
Confirm your custodian has the correct birth date, decide whether to take the distribution in cash or as an in-kind transfer, and consider a qualified charitable distribution, which lets you send up to $105,000 directly to charity and count it toward your RMD without adding to taxable income.
Our take: RMDs are less a punishment than a scheduling problem, and scheduling problems have solutions.
Anyone within five years of 73 should run the numbers now, not in April when the mailbox is full and the clock is short.
Final Thoughts
A few hours with a tax pro beats handing a quarter of a missed withdrawal to the government.