If you turned 73 this year, the IRS has a message that arrives with the subtlety of a birthday card from a debt collector: you must start pulling money out of your tax-deferred retirement accounts, whether you need the cash or not.
It's called a required minimum distribution, or RMD, and it's one of the most misunderstood rules in personal finance.
Miss it, and the penalty is a 25% excise tax on the amount you should have withdrawn — dropping to 10% if you fix the mistake quickly.
Here's the part that trips people up: an RMD isn't a suggestion or a tax strategy.
It's a government-mandated withdrawal, and the IRS taxes it as ordinary income.
The rule kicks in for most people at age 73, though anyone born in 1960 or later waits until 75, thanks to a change tucked into the Secure 2.0 Act.
The math depends on your account balance and life expectancy.
The IRS divides your balance as of Dec. 31 of the prior year by a factor from its Uniform Lifetime Table.
At 73, that factor is 26.5, meaning someone with a $500,000 IRA must withdraw roughly $18,868.
By 80, the factor shrinks to 20.2, pushing the required amount higher even if the balance stays flat.
Traditional IRAs, 401(k)s and most workplace plans are covered.
Roth IRAs are not — a quiet perk of paying taxes upfront.
But a Roth 401(k) is subject to RMDs, a detail that catches people who rolled one over expecting the same treatment as a Roth IRA.
The first-year grace period is another trap.
You can delay your very first RMD until April 1 of the following year, but that means taking two distributions in the same calendar year — a double dose of taxable income that can push you into a higher bracket, raise your Medicare Part B and D premiums through income-related monthly adjustment amounts, and even trim the taxable portion of your Social Security.
That ripple effect is where the real money is lost.
A retiree who takes two RMDs in one year might see a Medicare premium surcharge that costs hundreds of dollars annually, all because of a timing decision made months earlier.
If you have multiple traditional IRAs, you can total the RMDs and take the full amount from any one of them.
Each 401(k) must be handled separately from its own plan, and you can't satisfy an IRA requirement with a 401(k) withdrawal or vice versa.
For people still working past 73, a "still working" exception may let you skip RMDs in your current employer's 401(k) — but not in an old employer's plan, and not in a traditional IRA.
The exception also doesn't apply if you own more than 5% of the business.
The cleanest defense is a qualified charitable distribution.
Once you're 70½, you can send up to $105,000 per year directly from an IRA to a qualifying charity.
It counts toward your RMD, keeps the money out of your taxable income, and can help hold down those Medicare surcharges.
The bottom line for anyone approaching 73: know your balance, know your factor, and don't wait until December to do the math.
Automating the distribution through your custodian is the simplest way to avoid a penalty that funds nothing but the Treasury.
My take: RMDs are less a retirement perk than a bill the tax code sends you for saving well.
Final Thoughts
Treat the deadline like any other recurring expense and build it into your annual calendar, because the 25% penalty is one of the few financial mistakes that's entirely avoidable.