If you turned 73 this year, the IRS has a message you probably won't love: it's time to start withdrawing from your retirement accounts, whether you need the money or not.
These forced withdrawals are called Required Minimum Distributions, or RMDs, and they apply to traditional IRAs, 401(k)s, and most other tax-deferred retirement plans.
The IRS charges 25% of the amount you should have withdrawn, dropping to 10% if you fix it quickly.
On a $20,000 missed distribution, that's a $5,000 hole in your pocket for a paperwork mistake.
The IRS takes your account balance from December 31 of the prior year and divides it by a life expectancy factor from an official table.
At 73, that factor is about 26.5, so a $500,000 balance means withdrawing roughly $18,900.
By age 85, the factor drops to around 16, pushing the required amount above $31,000 on the same balance.
Even if your account stays flat, your forced taxable income grows every single year.
For retirees who also collect Social Security, a larger RMD can push more of those benefits into the taxable column.
It can also trigger higher Medicare Part B and Part D premiums through income-related surcharges, which feel like a hidden tax on top of a tax.
The good news is that RMDs are flexible in a few key ways.
You can take the entire amount in one lump sum or spread it across monthly payments.
You can also satisfy the requirement from one account or several, as long as the total matches what you owe.
And if you're still working past 73, a 401(k) at your current employer may be exempt, though IRAs never are.
One deadline trips up even careful savers.
Your very first RMD can be delayed until April 1 of the following year.
But take it then, and you'll still owe the second year's distribution by December 31, doubling your taxable income in a single tax year.
For most people, taking the first one on time is the smarter move.
There's a legal way to shrink future RMDs: qualified charitable distributions.
Once you're 70½, you can send up to $105,000 per year directly from an IRA to a qualified charity.
That money counts toward your RMD but never appears as taxable income, which can protect your Medicare premiums and Social Security taxation.
Roth accounts offer another escape hatch.
Roth IRAs have no RMDs during the owner's lifetime, so converting money during lower-income years can reduce the required withdrawals later.
The tradeoff is paying taxes on the conversion now, which only makes sense if you expect higher rates or larger RMDs down the road.
The simplest defense is planning years ahead.
Many retirees ignore RMDs until the year they turn 73, then scramble.
Checking your projected distributions annually, especially after a strong market year, keeps surprises off your tax return. **Our take:** RMDs aren't optional, but the tax damage they cause often is.
Final Thoughts
A few hours with a tax professional before the deadline can save thousands compared to discovering the problem in April.