If you turned 73 this year, the IRS has a message: it wants its share of your retirement account, whether you need the money or not.
Required minimum distributions, or RMDs, force savers to withdraw a minimum amount from traditional IRAs and most workplace retirement plans each year once they hit a certain age.
Miss the deadline, and the penalty is steep.
The rule applies to traditional IRAs, 401(k)s, 403(b)s, and most other tax-deferred plans.
Roth IRAs are the big exception, since they don't require withdrawals during the owner's lifetime.
The logic is simple: you avoided taxes going in, so the government eventually wants taxes coming out.
Here's the math that catches people off guard.
The IRS divides your account balance by a life expectancy factor published in IRS tables.
At 73, that factor is about 26.5, meaning you must pull roughly 3.8% of your balance.
By your mid-80s, the divisor shrinks to around 16, pushing your required percentage above 6%.
The older you get, the larger the forced slice.
The penalty for skipping an RMD is one of the harshest in the tax code: 25% of the amount you should have withdrawn, though it drops to 10% if you fix the mistake promptly.
That's on top of the income tax you'll still owe on the withdrawal itself.
If you have multiple IRAs, you can take the total from one or split it across accounts, but each 401(k) generally must be handled separately.
You can delay your very first RMD until April 1 of the following year, but doing so means taking two taxable withdrawals in the same calendar year.
That can push you into a higher bracket, increase Medicare premium surcharges, and make more of your Social Security taxable.
For most people, taking the first one on schedule is simpler.
There are a few legitimate ways to reduce the sting.
Qualified charitable distributions let you send up to $105,000 per year directly from an IRA to charity, and that amount counts toward your RMD without adding to your taxable income.
Converting part of a traditional IRA to a Roth in low-income years can shrink future RMDs, though you'll owe tax on the conversion.
And if you're still working past 73 and don't own more than 5% of the company, your current employer's 401(k) may be exempt from RMDs until you actually retire.
The details matter, and getting them wrong is expensive.
Custodians like Fidelity, Vanguard, and Schwab typically calculate RMDs for you and let you set up automatic distributions.
If you've inherited an IRA, different rules apply, and in many cases you'll need to drain the account within 10 years.
Before the year ends, check your balance, confirm your deadline, and decide whether a charitable transfer or a partial Roth conversion makes sense for your situation.
A tax professional or fiduciary advisor can run the numbers specific to your income and bracket.
Our take: RMDs are less a punishment than a scheduling problem, but they're easy to ignore until a penalty notice shows up.
Final Thoughts
A 20-minute review each fall can save you thousands and keep more of your retirement money working for you instead of heading to Washington early.