Tapping your savings, even if you'd prefer not to – You’ve been salting away a portion of your earned income into tax-advantaged individual retirement accounts (IRA) or 401(k) accounts for years. Nice work. But you can’t avoid paying taxes indefinitely. You’ll eventually need to start withdrawing from those accounts in the form of required minimum distributions (RMDs for short). The IRS will tax those distributions as ordinary income.  

Your RMD threshold depends on your age – The age rules for RMDs have been a moving target. In 2019, Congress changed the long-standing age threshold for RMDs from 70 ½ to 72. Then, a 2022 law raised the age from 72 to 73—the current threshold—effective in 2023. In 2033, the age threshold rises again to 75.

Still working? You might be able to delay RMDs – Even if you’re 73 or older, your 401(k) or 403(b) account more than likely can remain shielded from RMDs until April 1 of the year after you retire. Check with your retirement-plan administrator to determine if your plan allows you to delay RMDs—not all of them do. There’s no exemption if you own at least 5% of your business, however.

IRAs, Roth IRAs: What's the difference? – With a traditional IRA, any regular contributions or investment gains are shielded from taxes until your RMD age kicks in. Roth IRAs are similar, but with two critical differences: (1) Roth IRA contributions are made with after-tax dollars, so you’re not taxed on withdrawals from a Roth, and (2) RMDs only apply to beneficiaries.

Other account types subject to RMDs – Retirement-savings accounts subject to RMD rules include: IRAs (including traditional, SEP and SIMPLE); and 401(k), 403(b), and 457(b) plans. In 2024, Roth 401(k), Roth 403(b), and Roth 457(b) accounts are no longer subject to RMDs.

Staying out of the penalty box – If you forget to take your RMD, you can potentially avoid the standard 25% penalty by (a) taking the distribution and (b) filing IRS Form 5329, requesting a waiver, and explaining why you missed the deadline. If the IRS dings you, the 25% penalty may be reduced to 10% if you correct the shortfall within a two-year window—or it could be waived entirely if the missed RMD was due to an error.

Sharpen your pencil and do the math – The minimum amount you should withdraw each year is calculated by dividing your account balance at the end of the previous year by the distribution period based on your age found in a table published by the IRS (see FIGURE 1 below and IRS Publication 590 at www.irs.gov for additional details). Talk to your tax professional to see if other IRS tables are more appropriate for your circumstances.

Multiple accounts? Consider aggregation – If you have account balances in more than one account type, you need to determine your RMD for each account separately. But some account types, including traditional IRAs, rollover IRAs, SEP, and SIMPLE accounts, can be aggregated (i.e., you can add up the RMD amount due for accounts held at different institutions but withdraw it from only one account). If you own more than one 401(k) account, you’re not permitted to aggregate them.

A win-win charitable contribution – You can reduce your taxable income while qualifying toward your RMD by directing up to $100,000 to a qualified 501(c)(3) charitable organization of your choice. Your retirement-account provider—not you—must issue the qualified charitable distribution (QCD) on your behalf by December 31 for the tax year. A QCD could be advantageous for high earners concerned about being bumped into a higher tax bracket or being forced to pay higher income-adjusted Medicare premiums.