Required minimum distributions are back in the spotlight, and this time the math is working against retirees.
After years of pushing the starting age back, the IRS is requiring older savers to pull more money out of their traditional IRAs and 401(k)s than they did a year ago.
For anyone born in 1955 or earlier, the deadline to take that money is December 31.
The RMD formula divides your account balance by a life expectancy factor the IRS publishes each year.
Because those factors shrink as you age, the percentage you must withdraw creeps up annually.
A 73-year-old might need to take out roughly 3.8% of their account, while an 80-year-old could be forced to pull closer to 5%.
On a $500,000 balance, that difference is real money moving from a tax-sheltered account into taxable income.
The bigger sting comes from account balances themselves.
A strong stock market over the past two years has inflated many retirement portfolios, and a larger balance means a larger required withdrawal even if the percentage stays the same.
Investors who let a rally ride without checking their RMD number may be in for a surprise when their tax preparer runs the totals.
The penalty for not taking an RMD is 25% of the amount you should have withdrawn, dropping to 10% if you correct the mistake quickly.
That is separate from the ordinary income tax you still owe on the distribution.
The IRS does not send a reminder letter before the deadline, so the burden falls entirely on the account holder.
There are a few practical moves worth considering before year-end.
If you do not need the cash, you can direct part or all of your RMD to a qualified charity through a qualified charitable distribution, which can satisfy the requirement while keeping the amount out of your taxable income.
You can also use the withdrawal to cover estimated taxes or rebalance a portfolio that has drifted heavy into stocks.
Taking the distribution early in the year gives you more control over your tax bracket, while waiting until December can push you into a higher marginal rate if you also have capital gains or a year-end bonus.
Retirees with multiple IRAs must calculate each account separately but can take the total from any one of them, a detail many people miss.
If you turned 73 this year, this is your first RMD, and the rules are stricter than the ones your parents followed.
The starting age moved from 70½ to 73 under the SECURE 2.0 Act, and it rises to 75 in 2033.
Anyone who inherited an IRA after 2020 generally faces a 10-year payout window with annual withdrawals required in most cases, adding another layer of complexity.
Our take: the RMD is not a punishment, it is a scheduling problem.
Retirees who treat it as a routine calendar item, reviewed every fall with a tax advisor, tend to avoid the two traps that hurt most, the 25% penalty and an unplanned jump into a higher bracket.
Final Thoughts
Ignoring it until December is how a manageable tax bill turns into a costly one.