The government offers retirement savers a significant tax advantage when they use certain retirement accounts. Traditional accounts allow many individuals to get deductions on contributions upfront, permitting tax payments to be delayed until distributions are taken. This approach allows more money to be invested early on.
However, this tax deferral is not indefinite; eventually, withdrawals must be made, and these withdrawals are subject to income tax. Once retirement savers reach a certain age, the government imposes Required Minimum Distributions (RMDs) on their accounts annually. Failing to take the full required minimum distribution on time could result in a penalty of up to 25% of the amount supposed to be withdrawn.
On top of the penalty, the required distribution still has to be taken, and taxes must be paid on it. The essential details for anyone with a retirement account to understand include how the government calculates the required minimum distribution. There are two key factors:
1.
Account Balance: Your account balance(s) at the end of the previous year. 2. Age: The age you’ll reach this year.
The IRS publishes a table of life expectancy factors, which is a number based on the projected remaining lifespan at each age. If your sole beneficiary is your spouse and they are more than 10 years younger than you, you’ll use the joint life expectancy factor table, based on both your and your spouse’s ages. Everyone else will use a uniform life expectancy factor.
To determine your RMD, divide each of your account balances at the end of the previous year by the appropriate life expectancy factor. It is crucial to note that RMDs cannot be combined across different types of accounts. For example, if you have both a 401(k) and a traditional IRA, the RMDs for these accounts must be taken separately.
Timing of new inherited IRA rules
The exception is if you have multiple traditional IRAs, where you can aggregate the total RMD amounts and withdraw the sum from a single IRA. However, you cannot combine RMDs for you and your spouse; distributions must be taken from individual accounts.
Anyone turning 73 in 2025 will need to start taking required minimum distributions. Typically, RMDs are due by the end of the calendar year, but the first distribution isn’t due until April 1 of the following year. This means that individuals who turned 73 in 2024 but haven’t taken their RMDs yet still have time before the deadline.
If you opt to wait until April 1 to take your first RMD, you will have to take two RMDs in that same year, potentially resulting in a significant tax bill since each distribution counts as regular income in the year it’s made. Consequently, it is often beneficial to take your first RMD in the year you become subject to them. The RMD age has undergone significant changes in recent years due to the Secure Act and the Secure 2.0 Act.
The Secure 2.0 Act raised the RMD starting age to 73 and established a further increase to 75 for individuals born in 1960 or later. If you inherit an IRA, you may have multiple options for how to manage that account. Spousal beneficiaries typically can roll over the inherited account into their own IRA.
Other beneficiaries might have different rules, especially those who inherited accounts before 2020. Under the Secure Act, new rules apply to inherited IRAs post-2020. Non-spousal beneficiaries now usually have to deplete the inherited IRA within ten years.
If the deceased account holder was already subject to RMDs, all beneficiaries must continue making these distributions annually. The IRS waived this requirement for the years 2021 through 2024 due to confusion about the new laws, but starting in 2025, RMD rules will apply in addition to the 10-year requirement to deplete the account. If you’ve inherited an IRA since 2020, ensure you’re set up with your financial institution to take an RMD this year.
If you’re subject to the new 10-year rule, also ensure you have a plan to deplete the entire account by the deadline.
