The ABCs of RMDs

Millions of people have been regularly socking away money in tax-advantaged accounts such as 401(k)s and IRAs. That’s terrific, since most of us will find income from such accounts extremely useful once we enter retirement. Unbeknownst to many of us, though, some of those accounts feature mandatory “required minimum distributions” (RMDs) — and if we screw up taking them, it can cost us a lot. (More on that soon.)

The kinds of accounts with RMDs include Traditional, Rollover, Inherited, SEP and SIMPLE IRAs as well as 401(k), 403(b), 457(b) and profit-sharing plans. Roth IRAs, notably, do not feature RMDs.

So when do you have to take these RMDs? They used to begin at age 70 1/2 (and still do for those who turned 70 1/2 before 2020), but the SECURE Act of 2019 has increased that to age 72 for those who turn 70 1/2 in 2020 or later.

More specifically, most of us need to take our first RMD by April 1 of the year following the year in which we turn 72. For example, if you turn 72 in 2021, you’ll have until April 1, 2022, to take your first RMD. In subsequent years, you must take your annual RMD before Dec. 31. This means you might take two RMDs in the first year — which could send you into a higher tax bracket for that year.

Here’s why it’s so critical to be RMD-savvy: If you fail to take your RMDs on time, the IRS can penalize you 50% of the amount of the RMD not taken by the deadline. So if you needed to withdraw, say, $8,000, you might have to forfeit $4,000!

Your RMD is calculated based on factors such as the balance of your retirement account as well as your (and your spouse’s) age. The IRS offers tables that can help you determine your RMD each year. Many companies that manage retirement accounts will automatically calculate RMDs for account holders; some also permit you to set up automated annual withdrawals, which can help you meet the deadlines.