If you turned 73 this year and have money sitting in a traditional IRA or 401(k), the IRS is about to tap you on the shoulder.
Required minimum distributions, or RMDs, force you to withdraw a minimum amount from most tax-deferred retirement accounts each year.
Miss the deadline — generally December 31 — and the penalty is a 25% excise tax on the amount you should have taken.
That drops to 10% if you correct the mistake within a two-year window.
It is not a rounding error for a $100,000 withdrawal.
Here is the part that catches people: the calculation is based on your account balance at the prior year's end, divided by a life expectancy factor from IRS tables.
Markets rise and fall, but the divisor marches down as you age.
That means the required percentage climbs every year, whether you need the cash or not.
For a 73-year-old, the factor is 26.5, so you divide last December 31's balance by that number.
The same portfolio can suddenly demand thousands more in taxable income — which can push you into a higher bracket, raise Medicare Part B and D premiums through IRMAA surcharges, and trim the value of other tax breaks.
This is where the financial industry has a field day.
Banks, brokerages, and annuity salespeople know RMD season triggers anxiety.
Expect pitches for "RMD-friendly" annuities, life insurance wrappers, and managed accounts — products that can carry fees of 1% to 3% or more.
The Roth IRA is exempt from RMDs during the owner's lifetime.
That is why converting traditional balances to Roth in lower-income years can reduce future forced withdrawals.
But conversions themselves are taxable now, and paying that tax from the wrong account can defeat the purpose.
A few practical guardrails: check whether you have a 401(k) still sitting with a former employer, since workplace plans follow different rules than IRAs if you are still working.
Confirm your custodian's automatic RMD service actually calculates correctly — errors happen.
And if you have multiple IRAs, you can take the total from one or several, but each 401(k) generally stands alone.
The truly wealthy have options most people do not: qualified charitable distributions let you send up to $105,000 per year directly from an IRA to charity, satisfying the RMD without adding to taxable income.
For everyone else, the math is simpler and harsher.
Fraudsters pose as "IRS RMD specialists" demanding immediate payment or bank details.
The IRS does not call, text, or email you about RMDs.
Final Thoughts
Our take: RMDs are a predictable tax bill dressed up as a surprise, and the people profiting most from the confusion are often the ones selling the fix.